[Senate Hearing 107-482]
[From the U.S. Government Publishing Office]
S. Hrg. 107-482
THE MULTIFAMILY ASSISTED HOUSING REFORM AND AFFORDABILITY ACT OF 1997
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HOUSING AND TRANSPORTATION
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
ON
EXPLORING THE SUCCESS OF THE ``MULTIFAMILY ASSISTED HOUSING AND
AFFORDABILITY ACT OF 1997'' AND THE SO-CALLED MARK-TO-MARKET
LEGISLATION
__________
JUNE 19, 2001
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PAUL S. SARBANES, Maryland, Chairman
CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas
JOHN F. KERRY, Massachusetts RICHARD C. SHELBY, Alabama
TIM JOHNSON, South Dakota ROBERT F. BENNETT, Utah
JACK REED, Rhode Island WAYNE ALLARD, Colorado
CHARLES E. SCHUMER, New York MICHAEL B. ENZI, Wyoming
EVAN BAYH, Indiana CHUCK HAGEL, Nebraska
JOHN EDWARDS, North Carolina RICK SANTORUM, Pennsylvania
ZELL MILLER, Georgia JIM BUNNING, Kentucky
MIKE CRAPO, Idaho
DON NICKLES, Oklahoma
Steven B. Harris, Staff Director and Chief Counsel
Wayne A. Abernathy, Republican Staff Director
Jonathan Miller, Professional Staff
Melody H. Fennel, Republican Professional Staff Member
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
______
Subcommittee on Housing and Transportation
JACK REED, Rhode Island, Chairman
JOHN F. KERRY, Massachusetts WAYNE ALLARD, Colorado
JOHN EDWARDS, North Carolina RICK SANTORUM, Pennsylvania
CHRISTOPHER J. DODD, Connecticut RICHARD C. SHELBY, Alabama
Kara M. Stein, Staff Director
Tewana Wilkerson, Republican Deputy Legislative Assistant
(ii)
C O N T E N T S
----------
TUESDAY, JUNE 19, 2001
Page
Opening statement of Chairman Reed............................... 1
Prepared statement........................................... 49
Opening statements, comments, or prepared statements of:
Senator Allard............................................... 2
Senator Corzine.............................................. 4
Prepared statement....................................... 49
Senator Sarbanes............................................. 6
Prepared statement....................................... 49
Senator Dodd................................................. 14
Prepared statement....................................... 50
WITNESSES
John C. Weicher, Assistant Secretary for Housing--FHA
Commissioner, U.S. Department of Housing and Urban Development. 4
Prepared statement........................................... 50
Response to written questions of:............................
Senator Allard........................................... 95
Senator Sarbanes......................................... 96
Ira G. Peppercorn, Director, Office of MultiFamily Housing
Assistance Restructuring, U.S. Department of Housing and Urban
Development.................................................... 7
Prepared statement........................................... 52
Peter Guerrero, Director, Physical Infrastructure Issues, U.S.
General Accounting Office, Accompanied by: Richard Hale........ 14
Prepared statement........................................... 58
Response to written questions of:............................
Senator Sarbanes......................................... 97
Senator Allard........................................... 102
Charles Wehrwein, Vice President, Mercy Housing, Inc............. 29
Prepared statement........................................... 75
Barbara J. Thompson, Director of Policy and Government Affairs,
National Council of State Housing Agencies..................... 31
Prepared statement........................................... 78
John Benz, President, Property Advisory Group, Inc............... 33
Prepared statement........................................... 82
Cathy Vann, President, Ontra, Inc................................ 35
Prepared statement........................................... 84
Geraldine Thomas, Vice President, National Alliance of HUD
Tenants........................................................ 38
Prepared statement........................................... 87
Additional Material Supplied for the Record
Miscellaneous letters submitted for the record by Senator Jack
Reed........................................................... 103
(iii)
THE MULTIFAMILY ASSISTED HOUSING REFORM AND AFFORDABILITY ACT OF 1997
----------
TUESDAY, JUNE 19, 2001
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Subcommittee on Housing and Transportation,
Washington, DC.
The Subcommittee met at 9:30 a.m., in room SD-538 of the
Dirksen Senate Office Building, Senator Jack Reed (Chairman of
the Subcommittee) presiding.
OPENING STATEMENT OF SENATOR JACK REED
Senator Reed. Good morning. Let me welcome everyone to this
morning's hearing and call it to order.
Today's hearing is about affordable housing and how to keep
it affordable. In particular, we will explore the success of
the MultiFamily Assisted Housing Reform and Affordability Act--
the so-called Mark-to-Market legislation. This law is scheduled
to expire on September 30, 2001, and we will be attempting to
determine how well it has worked and whether it needs to be
reauthorized.
We will have two panels of witnesses. The first panel will
consist of our three Government witnesses; John Weicher,
Assistant Secretary for Housing and Urban Development; Ira
Peppercorn, Director of the HUD Office of MultiFamily Housing
Assistance Restructuring; and Peter Guerrero, Director of
Physical Infrastructure at the General Accounting Office.
Our second panel, will consist of the stakeholders involved
in the restructuring process. I will introduce these
individuals later.
We will be asking all of the witnesses to tell us what
progress has been made in restructuring the rents and debts of
the FHA-insured Section 8 portfolio, the savings such
restructurings have generated for the Federal Government, the
physical condition of the housing stock, the effectiveness of
the Office of MultiFamily Housing Assistance Restructuring, or
OMHAR.
We look forward to examining all of these issues in detail
today.
As we well know, Congress passed the Mark-to-Market
legislation in 1997 in order to update and restructure Section
8 project-based developments insured by the FHA. About 8,500
such projects with over 800,000 units of affordable housing
were built in the late 1970's and the early 1980's.
The Federal Government guaranteed that these projects would
be built by insuring the mortgages and using Section 8
contracts to guarantee that the rents would be high enough to
pay off the mortgages. In most markets, these rents were above
market value. Typically, the mortgages for these multifamily
dwellings had terms of 40 years and the Section 8 contracts had
terms of 20 years.
By the late 1990's, the 20 year Section 8 contracts started
to
expire and the Congress had begun to renew all Section 8 con-
tracts at market rents for a period of only 1 year. In markets
in
which the fair market rent was higher than the contract rent, a
simple renewal of the contract was sufficient to continue
supporting the property.
However, in many cases, contract rents remained far above
local rents. In these cases, Congress' decision to renew
Section 8 contracts at lower market rents was likely to result
in rents too low to support the remaining mortgage payments on
such properties. As a result, it looked likely that these FHA-
insured properties would default, costing Federal taxpayers
tens of billions of dollars.
The Mark-to-Market legislation was passed as an attempt to
address this problem. There were two objectives. First and
foremost, the legislation was meant to preserve affordable
housing by putting it on a stronger footing, both financially
and physically. And second, the law was designed to reduce the
cost to the Federal Government of rental assistance payments.
We also created the Office of MultiFamily Housing
Assistance Restructuring--OMHAR--to accomplish both of these
objectives, with the help of Participating Administrative
Entities.
We look forward today to the testimony of our witnesses on
the relative progress the Mark-to-Market Program has had and
how we should reauthorize and extend this program in full or in
part.
Let me recognize my colleagues before I formally introduce
the witnesses.
Senator Allard do, you have any comments?
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. Yes, Mr. Chairman, brief comments, if I
might.
First, I want to congratulate you on holding your first
hearing as the new Chairman of this Subcommittee.
Senator Reed. Thank you.
Senator Allard. And I look forward to continuing our
productive working relationship. I believe that oversight is an
important responsibility of legislators. Maybe it is the most
important thing. It is probably the thing that you get the
least credit for because
everybody is looking for how much legislation you can pass and
bills that you can get passed.
I think that it is important that as a Committee, we follow
up and see how the legislation is being implemented once we do
pass it. And I believe that good, effective oversight is a
bipartisan issue and I look forward to working with you as we
continue the diligent oversight conducted by this Subcommittee.
The Housing and Transportation Subcommittee held an
oversight hearing of HUD's Office of MultiFamily Housing
Assistance Restructuring, or OMHAR, 2 years ago. At that time,
OMHAR was just beginning to contract with Participating
Administrative Entities. (PAE's). We did not have the advantage
of a broader perspective on the program.
This hearing is an excellent opportunity to revisit the
issue and to evaluate OMHAR's progress thus far.
Congress created the Mark-to-Market Program in 1997, to
reduce Section 8 costs, while preserving the affordability and
availability of low-income rental housing. The purpose of the
program is to reduce the property rents to market level, while
simultaneously reducing property debt levels and owner costs to
a number of tools authorized by that legislation.
These mortgage restructurings are carried out by
participating administrative entities. As part of the same
legislation, Congress established OMHAR to administer the Mark-
to-Market Program and oversee the Participating Administrative
Entities. The legis-
lation authorized the Mark-to-Market Program for 4 years.
Therefore, the Mark-to-Market Program authority and OMHAR's
administrative authority expires on September 30, 2001.
Even though the program and administrative authority will
expire, Section 8 properties with above-market rates will still
be required to have their rents reduced to market levels.
Without the proper tools to also restructure the debt, many
owners may lack sufficient funds for property maintenance or
mortgage payments.
Because many Section 8 properties are also FHA-insured,
this would result in a significant number of claims against
FHA, in addition to many tenant displacements.
Clearly, no one finds this a desirable scenario. By taking
up the issue of mark-to-market reauthorization now, we can
avoid it.
I believe that today's hearing is an excellent step in that
direction and will provide Members with an opportunity to
examine the successes and shortcomings of mark-to-market and
OMHAR as we begin to formulate reauthorization legislation. I
am pleased that we have a broad representation of viewpoints at
today's hearing. GAO has been reviewing OMHAR for sometime now,
and I am sure that they will have valuable insight to share
with us.
We will also have a chance to hear the views of the mark-
to-market participants, including the perspective of OMHAR,
tenants, public PAE's, private PAE's, nonprofits and owners.
I look forward to hearing from all of you.
Finally, I would like to extend a special welcome to
Charles Wehrwein of Mercy Housing, which is headquartered in
Denver. Mercy Housing has been very beneficial, I believe, to
the Denver community and I am pleased to have them represented
here today on a later panel. I would like to welcome him
personally.
Again, I want to thank my colleagues for holding this
hearing and I look forward to working with you on this
important matter and also, I personally would like to welcome
the witnesses that we have on the panel.
Thank you, Mr. Chairman.
Senator Reed. Thank you very much, Senator. Thank you for
your kind words.
I have a difficult act to follow. You have conducted this
Subcommittee with great courtesy and bipartisanship and
attention to substance, and I hope that I can maintain those
standards.
Senator Allard. I am looking forward to working with you,
Mr. Chairman.
Senator Reed. Thank you, Senator.
Senator Corzine.
COMMENTS OF SENATOR JON S. CORZINE
Senator Corzine. Mr. Chairman, I too congratulate you on
your first hearing. And I also would express my gratitude to
Senator
Allard for his strong leadership in the short time that I have
been here, and I appreciate working with both of you.
This is an important issue. I have a statement for the
record that I would ask that you include. I welcome the
panelists and look forward to finding out more about this
program and its effectiveness.
I agree with this oversight comment that Senator Allard was
making as one of our more important responsibilities.
Thank you very much.
Senator Reed. Without objection, the statement will be made
a part of the record.
Now let me introduce the panel.
Mr. John Weicher is the newly-confirmed Assistant Secretary
for Housing and also serves as the FHA Commissioner.
Prior to his appointment, Mr. Weicher was a Senior Fellow
and Director of Urban Studies at the Hudson Institute. He has
also served as HUD Assistant Secretary for Policy Development
and Research, from 1989 to 1993. He was also Associate Director
of Economic Policy at the Office of Management and Budget, from
1987 to 1989, and earlier served as HUD Deputy Assistant
Secretary for Economic Affairs, from 1975 to 1977.
Ira G. Peppercorn is Director of the HUD Office of
MultiFamily Housing Assistance Restructuring--OMHAR. Before his
confir-
mation as Director of OMHAR, Mr. Peppercorn was the General
Deputy Assistant Secretary for Housing, and Federal Housing
Commissioner at the Department of Housing and Urban
Development. Before that, he served as the Executive Director
of the In-
diana Housing Finance Authority. In that capacity, he was the
Senior Advisor to Governors Evan Bayh, our colleague on the
Committee, and Frank O'Bannion, on affordable housing.
Peter Guerrero is GAO's Director of Physical
Infrastructure. In this capacity, Mr. Guerrero is responsible
for managing GAO's work on housing, transportation,
environmental infrastructure, and telecommunications issues.
Mr. Guerrero's distinguished Federal career spans some 29
years. In addition to GAO, Mr. Guerrero has worked at both the
Department of Labor and the Environmental Protection Agency.
I would also like to introduce Rick Hale to the Committee.
He will be sitting in on the panel today. Mr. Hale was the
principal investigator for the GAO study on the mark-to-market
reauthorization, which Mr. Guerrero will speak to today.
Secretary Weicher.
STATEMENT OF JOHN C. WEICHER
ASSISTANT SECRETARY FOR HOUSING-FHA COMMISSIONER
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Mr. Weicher. Thank you, Mr. Chairman. And thank you for
inviting me to testify this morning on the impending expiration
of the Office of MultiFamily Housing Assistance Restructuring.
I am here today to discuss the Administration's position
concerning the future of OMHAR and its legislative authority.
Before I begin, let me express my appreciation to this
Committee for voting to confirm me as Assistant Secretary for
Housing and FHA Commissioner. It is an honor to appear before
you today.
I am reminded that the first question at my confirmation
hearing from Senator Sarbanes concerned the Mark-to-Market
Program. Chairman Reed, you also raised the issue during the
hearing with me, so it is fitting that my first hearing before
this Subcommittee should be on the same subject.
Mr. Chairman, the challenges of HUD's multifamily assisted
inventory is the most complex issue that HUD has ever had to
face. I first became involved in this subject 15 years ago as a
member of the Hills-Reuss task force. Congress has enacted
major legislation on three separate occasions beginning in
1987. During the mid-1990's, Congress wrestled for 3 years with
the mark-to-market concept before finally passing the 1997 Act.
The process for dealing with these properties has taken longer
than originally anticipated, we need to revisit this issue yet
again.
Since becoming Commissioner, I have discussed OMHAR with
Secretary Martinez and there are ongoing discussions within the
Administration. Secretary Martinez stated in April the
Administration intends to seek an extension of the
restructuring authority and reiterated this position in his
testimony before the Senate Appropriations Subcommittee last
week.
As this morning's hearing demonstrates, there appears to be
general support for an extension of the restructuring authority
beyond this September, and the Administration will be
submitting detailed legislative recommendations on how to
proceed with that extension.
The future of the OMHAR office itself has generated a
greater level of discussion than the extension of its
authority.
Until this year, nearly all of OMHAR's actions were rent
restructurings, without any changes in the mortgage amount. The
first full mortgage restructuring did not occur until the
second quarter of last year.
Since then, however, there has been significant progress.
There are only 30 full mortgage restructurings in the year
2000. So far, in 2001, there have been 77 in 5 months, and I
understand that an additional 75 are scheduled for closing in
the next 60 days. This is encouraging. But clearly more work
needs to be done, and we want to ensure that this important
work is allowed to continue.
Secretary Martinez discussed the future of OMHAR itself in
his Appropriations Subcommittee testimony. He stated that the
Department expects to request a 3 year extension for OMHAR with
two changes. It would not be headed by a Presidential
appointee, and it would fall under the authority of the Office
of Housing.
Placing OMHAR within Housing would simplify issues of
jurisdiction and coordination. At present, Housing is
responsible for making project subsidy payments and managing
insurance contracts, while at the same time OMHAR is
responsible for restructuring the subsidies and contracts for
the future. The same projects are under the jurisdiction of two
separate, equal offices, each reporting to the Secretary. With
OMHAR under the authority of the Commissioner, this anomalous
situation would no longer exist. It would also be easier to
coordinate OMHAR with the 18 MultiFamily Hubs in the Office of
Housing that are located around the country. We also believe
OMHAR will be able to complete its work faster with a simpler
administrative structure.
I want to stress that we certainly recognize the critical
nature of OMHAR's work and we have every expectation that it
will continue to be fully dedicated to that work and only that
work. Having come halfway through the mark-to-market process,
we intend to see it through to completion.
Since OMHAR would be reporting to the Commissioner, we do
not expect to recommend reauthorization of the position of
OMHAR Director as one requiring appointment by the President
and confirmation by the Senate. This would avoid a circumstance
where one Presidential appointee reports to another
Presidential appointee of equivalent rank.
We understand that almost two-thirds of the remaining
properties subject to debt restructuring have contracts that
expire in the next 2 fiscal years. With an average processing
time of about 13 months after contract expiration, we believe
that a 3 year ex-
tension is appropriate. By 2004, we should all be able to judge
whether any further extension is needed, or whether the small
remaining workload can be handled within FHA.
Mr. Chairman, OMHAR was created to strike a balance between
the preservation of affordable rental housing and the rising
costs of renewing expiring Section 8 contracts. That is
important work. For Secretary Martinez and for me, continuing
this work is one of our highest priorities.
We look forward to working with Congress and working with
this Committee in the coming weeks on this important issue.
Thank you.
Senator Reed. Thank you very much, Mr. Secretary.
We have been joined by Chairman Sarbanes. And at this time,
I would recognize him for an opening statement.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Well, thank you very much, Mr. Chairman.
I apologize. There was a traffic back-up that prevented me from
getting here at the outset.
I wanted to congratulate you on the occasion of taking on
the gavel of the Housing and Transportation Subcommittee. Given
your ongoing active interest in these issues, we very much look
forward to your leadership of the Subcommittee.
We can use that transportation dimension to address the
problems that we encountered here this morning.
[Laughter.]
I also know that you and Senator Allard have worked
together in a very cooperative fashion and we look forward to
that relationship continuing.
Actually, the Subcommittee has not been officially
reorganized, nor has the Committee itself been reorganized.
That is still pending. Senator Gramm and I talked and we are
proceeding, at least with the hearing schedule. I think we will
have to get ourselves into place before we can actually
transact the business agenda. But we are trying to move ahead
and prepare.
This is a very important hearing, to review the bipartisan
legislation passed in 1997 to deal with the expiration of
Section 8 contracts on FHA-insured buildings. The purpose of
that legislation was to reduce Section 8 rents that were above
market, to restructure the mortgages where necessary, and
provide for much needed renovation.
The results we were aiming for and which we seem to have
been achieving to date was the upgrading and preservation of
valuable affordable housing at rates that were more affordable
for the Federal Government as well.
The legislation establishing this Mark-to-Market Program,
as well as the Office of MultiFamily Housing Assistance
Restructuring, which was created to implement the program,
unfortunately expire at the end of this fiscal year; namely,
September 30. Yet, it is obvious that we need the program to
continue. It is making advances, but the job has by no means
been completed.
And obviously, we have the responsibility to decide how we
want to proceed with regards to the legislation. I look forward
to working with my colleagues here and with the Administration
to come to a fair determination on how to keep this effort on
track.
Let me again thank Senator Reed for holding this hearing.
He has put together two very good panels of witnesses, which, I
think will give an opportunity for all stakeholders to
participate. I feel very keenly that the Committee should
proceed in a comprehensive, workman-like manner, in an effort
to hear from all interested parties. And that is what has been
set out for today's agenda. I think, in the end, this kind of
thorough review and comprehensive airing of the issues will
result in better legislation and this hearing is obviously
consistent with that approach.
So, Mr. Chairman, congratulations on assuming the gavel. I
look forward to working with you and Senator Allard and my
other colleagues as we address this.
This is one of a list of reauthorizations that I set out
last week, that the Committee has to address over the next few
months. We have various expiring authorizations in different
areas of our jurisdiction and this is one of them.
This program is up and going. We would like it to be going
much faster. Presumably, Mr. Peppercorn will address that. But
this is one of the must items on the Committee's agenda.
Thank you very much for scheduling this very good hearing.
Senator Reed. Thank you, Mr. Chairman.
And now, I would like to call on Mr. Peppercorn.
STATEMENT OF IRA G. PEPPERCORN
DIRECTOR, OFFICE OF MULTIFAMILY
HOUSING ASSISTANCE RESTRUCTURING
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Mr. Peppercorn. Thank you, Mr. Chairman, Ranking Member
Allard, Senators Sarbanes and Corzine. Thank you very much for
the opportunity to be here today with you to give you a status
report on the Mark-to-Market Program.
At this time, I would like to thank Secretary Martinez. He
is a good man. He is going to do a great job. His staff,
Commissioner Weicher, who has a long history and a good history
in housing, for their leadership and for asking honest
questions about the Mark-to-Market Program. If the program is
continued--and I hope that it is--I believe that their
thoughtful analysis will only serve to strengthen it.
I would like to give a small caveat this morning and say
that, as you see on television sometimes, the remarks here are
my own, or on the editorial pages. They are my own. They are
not necessarily the views of the Administration.
But there has been a lot of dialogue and a lot of good
communication between my office and the new team over at HUD.
I would also like to recognize a man that is not here at
this moment. I had the honor of serving under Senator Bayh when
he was Governor of Indiana for both of his terms. His
leadership and his vision and his spirit of bipartisanship have
assisted me over the years and has been very inspiring to me
and to the others who elected him to serve.
What I would like to do now is give you a brief, but
comprehensive, look at what has been accomplished by OMHAR
through the Mark-to-Market Program, what remains to be done,
and what will be needed in order to allow the Mark-to-Market
Program to continue achieving the goals that the Congress
envisioned in the MAHRA legislation.
Congress created the Office of MultiFamily Housing
Assistance Restructuring--OMHAR. It is quite a name, I know.
But it has a very important purpose.
It was created as a semi-independent entity within HUD to
address financial crisis in the Section 8 program. Former
Senator Mack noted at the time that an effort to ``reform the
Nation's assisted and insured multifamily housing portfolio''
was needed in order to handle what was termed the most
difficult problem in housing at the time. And in fact, this
morning, you heard Commissioner Weicher say much the same
thing--the most complex issue that HUD has ever faced.
OMHAR has accomplished much and worked very hard to meet
the challenge of its mission. In fact, some of the challenges
are competing challenges. But unless changes are made to the
sunset provision in the legislation, OMHAR and its
restructuring authority will go out of existence on September
30 of this year. However, the statutory requirement and the
need to reduce the rents on the expiring above-market
properties will continue either imperilling the financial
health of properties around the country or creating a situation
where rents are not in fact reduced to market.
There are a number of goals for the Mark-to-Market Program.
Social goals, particularly in terms of preserving affordable
housing, financial and economic goals in terms of reducing the
long-term, project-based assistance, and minimizing the risks
of large FHA losses. And then there are managerial and
administrative goals--promoting, operating, and cost
efficiencies, addressing problems that have occurred over the
years by terminating relationships with owners or managers who
have not met their obligations, establishing a network of local
public and private entities to administer the Mark-to-Market
Program, involving tenants in one of the most substantive ways
that we have ever seen, and providing a consistent, prudent,
and documented process for all participating properties.
The environment today, both the economic and the political
environment, differs markedly from when this legislation was
first passed. Fewer properties have entered the program than we
had
expected.
Nonetheless, the Mark-to-Market Program offers a win-win
opportunity for government, for taxpayers, for tenants, and for
communities. And as more deals are closed, we save more money
by reducing excess payments on Section 8 subsidy contracts,
ensuring that the properties involved are on a sound financial
footing, preserving needed units of affordable housing, and
thereby meeting the goals of the Mark-to-Market Program.
Before you, you see a chart.
[Pause.]
You almost saw a chart.
[Laughter.]
Almost 900 properties, comprising over 63,000 units, have
gone through the Mark-to-Market process, resulting in a net
savings of almost $900 million, a present value of over half a
billion dollars. A big job remains--about half the properties
assigned to OMHAR are still in the process, representing an
additional net savings of $1\1/2\ billion over 20 years, or a
present value of over $800 million.
We will talk about the costs later, but the operational
costs, not including the PAE's, are about $40 million. So what
we are seeing is a very significant savings compared to what we
are spending.
Chart 3 shows that in addition to the large number of
contracts that expire through the remainder of the fiscal year,
there are 3,400 more Section 8 contracts expiring in the next 3
years, about a third of which are estimated to be above market.
You will hear some folks say that we got off to a slow
start. I will probably agree with that. But what you hear today
is that the Mark-to-Market Program is operating efficiently and
effectively. Part of our management approach, and you will read
this in the various reports on OMHAR, has been to integrate
constructive feedback from all of the stakeholders, enabling us
to incorporate significant improvements in the process.
We have not been the type of organization that set up
everything in place day one and then said, ``We got it right.
We got it perfect.''
We did not, but we spent a lot of time listening to the
various stakeholders, making the needed changes, listening to
the owners, making the needed changes, and adjusting as we went
along. We are operating with an experienced and highly
motivated staff and with public and private contractors.
Let me give you a better idea of what we have done.
We currently have almost 1,800 properties with about
140,000 units. We are facilitating to preserve them. The
underwriting
requirements of the Mark-to-Market Program ensure that these
affordable housing properties will be operated in a manner to
en-
sure their ongoing viability. At a time when affordable housing
is in short supply in many parts of the Nation, Mark-to-Market
Program provides critically needed continuity to many
communities
and residents.
One of the Nation's largest apartment owners, Denver-based,
AIMCO, has 110 projects in the program, considers the Mark-
to-Market Program important to AIMCO and its residents in its
affordable housing portfolio. And here, though it is not in my
testimony, let me take a side note and say, this was one of the
innovations we created. Originally, when AIMCO came in, they
might have had to deal with PAE's in 25 or 30 different States
and four regional offices.
We created a large owner program so that they could
facilitate access to the properties, and they would only have
to deal with one regional office and two PAE's. They were able
to bring in properties that not only were expiring before
September 30, but, importantly, after. That is one of the
innovations.
What they have said about us is that the program will
enable them to continue to provide safe and decent affordable
housing to qualifying tenants for many years to come while
protecting HUD from claims under its mortgage insurance
programs. The program is an important element in addressing the
affordable housing requirements in the country. Their statement
has been submitted to the Subcommittee.
Completed transactions so far have resulted in a savings of
just under $900 million, with $2.4 billion to go. And present
value, it is $500 million and $1.3 billion. This is not a final
tally of the Mark-to-Market Program, since additional
properties expected to enter the Mark-to-Market Program between
now and the sunset date will generate future savings.
I have one property here. The property is called Monview
Heights. It consists of 326 units in West Mifflin Pittsburgh.
It is a working class neighborhood roughly 5 miles from
Pittsburgh. There is going to be a net savings to the
Government after a restructuring of almost $12 million.
Now, I know that the way the Federal budget works, you
cannot just take it from one pot and put it into another. But
when we have been paying so much money in excess of the market
at a time when there is such a drain on money for affordable
housing, if we can save that type of money, preserve the
housing, keep people in their place, to the Federal Government
as a whole, that is more money that can be used for other
purposes and, hopefully, for affordable housing. Let me share
some of the processes that we adopted to make sure this
happened.
We made sure that there were national standards for
consistency, but we enabled local solutions to local
communities and local governments. We utilize a small staff of
Government employees to leverage public and private
contractors. There are less than 100 OMHAR employees
nationally. We rely on business- and market-oriented principles
to set rents. We encourage tenants to participate. And we
maintain communications and we share information with all of
the stakeholders.
The result of the process is savings to the Government, and
to the taxpayer, that are generated even as the affordable
housing remains available, and even as the physical condition
is improved.
The fundamental complexity, though, the reason why you
might have heard we got off to a slow start, has to do with the
nature of the work that must be accomplished to restructure a
property.
It is not an easy task.
The original thinking of we just set rents to market leads
to a whole host of questions--What is the market? How do you
assess it? How do you appraise it? How do you know?
We just cannot go out there and say, it should be a
percentage of Fair Market Rent (FMR), because most people will
tell you that the fair market rents are often neither fair, nor
market.
There is no national database. This really shocked me.
There was no national database where you can go in and submark-
to-submarket, find what the rents are in that particular
community. So, property by property, we have had to go in and
assess them all individually. These are all one-off, difficult
work-outs. They are not anything that can be done en masse.
The real estate work-outs occur in the context of a very
complex legislative and regulatory environment, and it also
includes negotiations with property owners, PAE's, tenants,
lenders, and others in the community.
Additionally, some properties, despite having rents above
market, have physical, financial or managerial problems, even
before the rents are reduced.
The legislative requirements of OMHAR are explicit
regarding transaction costs and cash flow to owners. For
instance, there is a mandatory 75-25 split the moment a deal is
restructured.
These terms created some difficult hurdles for us. In some
cases, property conditions or ownership problems have been such
that we have not been able to close a restructuring transaction
or continue assistance on a project-based basis. At that time,
we have to figure out how to best protect the tenants and
sometimes we have to voucher the property.
How has OMHAR responded to these challenges?
We have listened to our stakeholders. We have implemented
changes when prudent and reasonable. We have developed a
program as flexible as possible within the context of
legislation. And as a result, starting last summer and moving
into the fall, we met with all kinds of stakeholders, resulting
in revisions and initiatives to address their concerns.
First, we introduced additional performance-based
incentives for participating owners. Every year after the Mark-
to-Market Program, if the property meets its physical,
managerial, and financial standards, the property owners will
receive a market level of return on the capital they were
required to invest.
Now you might say, why didn't we offer this earlier?
Remember the context in which we were working, where people
were thinking that owners were just simply getting too much.
To have added to that at the time, and this was the direct
feedback that we got, was we would make the deal too rich. And
so what we did is we listened and we listened to the owners'
communities and we listened to the tenant groups and we
listened to the nonprofits. I personally sat down with the
Inspector General and I said, this is the problem that we are
facing. The deals will not work from a financial point of view
unless we do this. And she put out her concerns, which had to
do with how they were going to be monitored afterwards, and in
the end, agreed with us.
That was not something that we could have done earlier.
Second, we introduced incentives for purchasers,
recognizing that the additional costs they will incur over
costs typically incurred by owners. This is true for both for-
profit and not-for-profit owners.
Third, we made use of the statutory authority to forgive
second mortgage debt when appropriate. And Chuck Wehrwein, who
will be speaking later, works for Mercy Housing, was someone on
our stakeholder panel who was working for a nonprofit, who can
tell you about the benefit of the reduction of that debt.
Finally, we introduced reforms to improve the level of
communication between owners, OMHAR, PAE's, and purchasers. We
gave owners and purchasers the right to receive various
important information throughout the restructuring process, and
we formalized the notification and appeal process.
Some other things which I will go through quickly.
We created an agreement with Ginnie Mae. We created a large
owner initiative. We have responded to concerns and comments
from our partners. All of these initiatives have demonstrated
our commitment.
So where are we today?
We have closed 126 full restructurings. We have about 75 in
the pipeline in the next 60 days. Five hundred what we call
Lites, which was a program innovation where people could take
the rent reduction without the debt restructuring. We have 116
in owner negotiations, 331 in due diligence and underwriting,
another 300 expected to come in. The thing is moving.
As the Commissioner said, there is absolutely more work to
be done. The program is in place. Yes, it took time for the
program to build its infrastructure. I want to make a side
comment here.
One of the things that we did at the very beginning was we
looked and we listened to what had failed in the past. And one
of the lessons was coinsurance.
What people said to me was, do not start rushing in to do
deals right away. Build the infrastructure first. I said this
before this body 2 years ago.
We took a lot of heat for that approach, but in the end, we
have the right structure. We have a structure that stood up to
public scrutiny, not once, not twice, but three times. And we
have a program that is working and working in a way that not
only financially and not only from a preservation point of
view, but also ethically, I feel completely comfortable
standing before this body and saying, we did the right thing.
Staffing--we have less than a 100 staff on board. Only 38
are permanent, 49 are temporary. And this is one of the core
problems. Two-thirds of our staff is comprised of production
staff who oversee the PAE's, who review the deals, who conduct
the closings. Three-quarters of those field staff that are
completing the restructurings are term employees, which means
that their jobs with OMHAR expire in 102 days.
The staff has incredible backgrounds. As envisioned under
the legislation, we have people from the RTC, from the FDIC,
from lenders, from nonprofits, from HUD, and from other Federal
Government agencies. It is an incredibly broad staff. I am
absolutely impressed by their dedication and their
professionalism, especially knowing that some of them are
worried about what is going to happen to them personally on the
September 30 sunset date.
The PAE's--our partners, are the third parties who actually
do the nitty-gritty work. And what we have seen is that there
has been a consolidation. We had 42 public PAE's and nine
privates. We are now working with 25 publics and nine privates.
Why?
One of the things that we learned again is that this job
was very tough, difficult real estate work. This was not just
tax credit allocation. Nor was it bond issuance. It meant very
difficult real estate knowledge. And what we saw was that there
was slower than expected deal flow, which means that the
volumes were insufficient. The restructuring process was much
more rigorous than they expected. Their staff had other
priorities. And there were many roles in terms of being a
Section 8 contract administrator and lender. That led to some
conflicts.
The consolidation has actually worked very effectively. But
with 900 deals under the belt, and more to come, we have a
stable capacity. It is important to emphasize that public
entities can and will continue to play a vital role, even
though in certain cases being a PAE has not been the best role.
HFA's, in their traditional role, and I am a former HFA
director, as affordable housing lender, tax credit allocator,
or allocator of housing grants, they are very well positioned
to work with us to provide funds to restructure properties. In
addition to their working relationships, public entities can
often be very helpful in
terms of knowledge about the properties and the owners in their
jurisdiction.
Chart 6 shows that we have arrived at a balance--in
quality, in oversight, and in timeliness, that is working. To
date, OMHAR has cost $32.4 million in staff and other costs,
due primarily to the financial advisors, achieving savings of
$866 million. That is a pretty impressive ratio.
What do we need to finish the job?
September 30, 2001, the sunset date called for in the MAHRA
legislation, is fast approaching. Planning must occur now to
determine the Government's approach to reducing rents on
expiring Section 8 contracts after that date. Without the
legislative authority to reduce a property's mortgage payment
when it is reduced, HUD will have to watch Section 8 properties
struggle with excessive debt burdens. Owners may cut back on
maintenance to make ends meet or default. And if we do not do
something quickly, people are going to be looking for other
positions. Over half of OMHAR's staff expire with the sunset.
The Mark-to-Market Program and its stakeholders will need
an assurance of continuity in order to maintain the momentum,
in order to continue to bring the benefits of affordable
housing units.
Mr. Chairman, we have a compelling story. We are not only
preserving affordable housing, but also doing it at a ratio
where cost savings are 20-1 of what our costs are.
We are happy to work with the new Commissioner and the new
Secretary toward a cooperative solution so that this terrific
program can continue.
Thank you.
Senator Reed. Thank you very much, Mr. Peppercorn.
We have been joined by Senator Dodd of Connecticut. Senator
would you like to make a comment?
COMMENTS OF SENATOR CHRISTOPHER J. DODD
Senator Dodd. Mr. Chairman, I would ask unanimous consent
that my comments be included in the record at this point. But
let's move along with the witnesses.
Senator Reed. Thank you.
Without objection, Senator Dodd's comments will be included
in the record.
Mr. Guerrero, could you strive for 5 minutes?
STATEMENT OF PETER GUERRERO
DIRECTOR, PHYSICAL INFRASTRUCTURE ISSUES
U.S. GENERAL ACCOUNTING OFFICE
ACCOMPANIED BY RICHARD HALE
Mr. Guerrero. Yes, Mr. Chairman.
Senator Reed. Thank you.
Mr. Guerrero. We are pleased to be here today to discuss
our report on the Mark-to-Market Program.
As you know, this program is aimed at preserving
affordability of low-income rental housing, while reducing the
cost of rental assistance subsidies. More specifically, the
program provides a framework to restructure Section 8
properties by lowering rents when those contracts expire and by
also reducing mortgage debt if such action is necessary for the
properties to continue to have a positive cash flow. Without
such restructuring, rents for many of the approximately 8,500
properties in HUD's portfolio would substantially exceed market
levels, resulting in far higher Federal subsidies under the
Section 8 program.
As provided for in the Act, OMHAR has contracted with
public and nonpublic entities--these are referred to as PAE's--
to carry out the mark-to-market restructurings on behalf of the
Federal Government. There are two kinds of restructurings. The
first is
referred to as a full mortgage restructuring and involves
reset-
ting a property's rents to market levels and reducing its
mortgage
debt by the amount needed to insure the property achieves a
positive cash flow. The second type is referred to as a rent
restructuring and it involves reducing the property's rent
levels, but not reducing its mortgage debt. This type of
restructuring generally occurs when the property is physically
and financially sound, so that it can continue operation at
market-level rents with the existing mortgage.
Legislation does expire at the end of this fiscal year.
After that, HUD will still be required to renew Section 8
contract rents at market levels, but the tools established by
the Act for restructuring the mortgage notes will no longer be
available. OMHAR's authority would also terminate at the end of
this fiscal year without further action.
Our statement today focuses on three issues. First, the
status of this program. Second, factors that have affected the
pace of the program. And third, advantages and disadvantages to
continuing the program and OMHAR.
In summary, we found, first, as of May 2001, approximately
1,500 properties were in OMHAR's Mark-to-Market Program. Figure
1 in my written statement shows that about 60 percent of these
properties will receive full mortgage restructurings and the
other 40 percent will receive rent restructurings.
Figure 3 in my written statement shows that OMHAR has
completed about 12 percent of the properties requiring a full
mortgage restructuring and about 84 percent of the properties
requiring rent reductions.
Figure 4 in my statement shows that OMHAR estimates the
Federal Government will realize about $500 million in savings
over a 20 year period from the restructurings that it has
completed so far.
However, for some properties that have not successfully
completed the restructuring process, the requirement to reduce
rents to market has decreased the properties' cash flows,
increasing the likelihood that these properties will develop
physical and financial problems later on down the road. And we
believe that these properties need to be very closely monitored
by HUD.
Second, Mr. Chairman, we found that various factors have
affected the pace of the program. It took almost 2 years to get
it up and running, during which time, as you heard, OMHAR had
established the infrastructure to begin assigning the large
volume of properties to the PAE's for restructuring.
Other factors may have slowed the process as well. The
initial process that OMHAR used for reviewing and approving
restructuring deals and detailed requirements contained in the
program's operating procedures guide, and the unwillingness of
some owners to participate in the program, were all factors.
However, OMHAR has taken actions to address these matters
and program stakeholders that we talked to, believe that the
pace of the program has improved.
While the program has proceeded more slowly than OMHAR
originally estimated, many stakeholders believe that OMHAR's
progress in implementing the program has been reasonable, given
the program's complexity and the number of tasks that needed to
be accomplished.
Third, Mr. Chairman, we found that extending the program
past its scheduled termination date would be more advantageous
to the Federal Government than ending the program.
As shown in Figure 5 in our prepared statement, there is
over 1,300 Section 8 contracts with above-market rents that
will expire over the next several years. If rents on these
properties are marked down to market levels, as they would be
required to do, even if the authority expired, without
providing for mortgage restructuring, the reduced rents may not
be sufficient to provide revenues to cover operating expenses,
mortgage payments, and much needed repairs. This would force
the owners to reduce expenditures for maintenance, adding to
the possibility of deteriorating properties and possibly
defaults on these properties.
Such outcomes--deteriorating properties and claims against
the FHA insurance fund--are outcomes that are generally viewed
as undesirable and would have an undesirable impact on the
affordability of American housing.
Extension of the program, on the other hand, would permit
Section 8 property owners with above-market rents and unexpired
contracts to benefit from the restructuring tools that are
currently available and prevent the adverse effects on
affordable housing that could occur if the program is not
continued.
For this reason, all of the program stakeholders who
participated in our panel, our expert panel that we sponsored
as part of our work, support the continuation of the program
beyond the end of this fiscal year when it would otherwise
terminate.
Finally, Mr. Chairman, we agree with the view expressed by
most program stakeholders that the administration of the Mark-
to-Market Program should continue to reside in an office
dedicated to the program's implementation and that office needs
the resources and expertise to administer the program and
oversee these complex transactions.
Some stakeholders felt that integrating this program into
HUD's Office of MultiFamily Housing could improve efficiency,
transferring program responsibilities from OMHAR to HUD without
dedicated staff to administer the program could disrupt
momentum.
There was also concern that if OMHAR staff transferred to
HUD were not assigned specifically to this mark-to-market
function, they could be reassigned by HUD to perform other HUD
functions. And this is given to the fact that we have
consistently been told that the HUD field offices and staff are
stretched very thin. So this is a well-founded concern.
In conclusion, Mr. Chairman, if the legislative authority
for the Mark-to-Market Program is allowed to expire on
September 30 of this year, HUD estimates it will have to reduce
the rents to market levels for some 1,300 properties without
having the tools necessary to mitigate the potential adverse
effects of such reductions. Doing so could both affect the
quality and availability of affordable housing. While
transferring authority for the Mark-to-Market Program to HUD's
Office of Housing could potentially help facilitate the
coordination of some mark-to-market related functions, care
must be taken to retain program staff resources and expertise.
Thank you.
Senator Reed. Thank you very much, Mr. Guerrero.
Let me begin the round of questioning by addressing a
question to Secretary Weicher. Mr. Weicher, what specific
changes would you be urging at this point with respect to
extension of the Mark-to-Market legislation?
Mr. Weicher. What changes in the authority? Mr. Chairman,
that discussion is still going on within the Administration and
at this point, we do not have a specific set of recommendations
to give you. I wish that we did and I can assure you that we
will be giving you recommendations as quickly as we possibly
can.
Senator Reed. Thank you. So, we can anticipate informally
being contacted with your proposals, both Senator Allard and I?
Mr. Weicher. Yes, you can. And formally, on behalf of the
Administration as well.
Senator Reed. Thank you, Mr. Secretary.
Mr. Guerrero, I will ask you the same question from your
perspective, and Mr. Hale's perspective. What changes would you
suggest as we go forward to the mark-to-market?
Mr. Guerrero. We provide in our report that is soon to be
issued a number of specific changes that key stakeholders
thought would be helpful to continue to move this program
along. We took no
position on those matters. We simply enumerated them. Some of
them include providing for additional funds to help with the
rehabilitation of these properties necessary to keep these
deals moving. Others deal with the administrative process in
terms of getting correct rent comparability studies that OMHAR
feels that they can rely on in the beginning of the process--
studies that are accurate and complete.
First I would say that the most important factor, though,
that we recommend here is, prompt action. Because of the
deadline, OMHAR will lose contract staff that have unique
expertise in this program if there continues to be uncertainty
with regard to the future of this program. Also, that
uncertainty will have an adverse effect on owners of these
properties creating some uncertainty as to what exactly to do.
Is it better to wait? Is it better to come in now and proceed
with these deals? So moving quickly is the most important thing
that we could recommend.
Second, the other thing that we would recommend is
certainly renewing the authority for restructuring the
mortgages. We think that that is critical to preventing future
defaults and deterioration of these properties.
Third, we would recommend that wherever this function
resides, whether OMHAR continues, whether it goes to HUD's
Housing Assistant Secretary, it is important to have dedicated
staff and resources to continue the momentum of the program.
Senator Reed. Thank you, Mr. Guerrero. You point out, as
you alluded to in your report, that, in your words, it would be
workable to place OMHAR under HUD's Office of Housing, so long
as such action does not disrupt program momentum.
One of the aspects of OMHAR is that, as you point out, many
of the staff are contract staff that are, as I understand,
reimbursed on not a typical civil service scale. Is that
correct?
Mr. Guerrero. That is correct.
Senator Reed. So in any transfer of functions directly
under HUD, your presumption would be that you would have to
main-
tain that scale of compensation and the same type of
contractual arrangements?
Mr. Guerrero. That is correct.
Senator Reed. And there is, I presume, a danger by
integrating it into HUD, or at least an issue whether or not
that same type of reimbursement and contract schedule would be
maintained.
Secretary Weicher, is that one of the considerations?
Mr. Weicher. Well, we certainly are aware of the issue, Mr.
Chairman. We know that it is a problem. We know that financial
regulatory staff in Washington are typically paid better than
staff who perform other functions in various Cabinet agencies.
So, we certainly intend to address that question seriously. And
while I cannot offer you a specific recommendation from the
Administration on this point, I can restate our commitment to
making this program continue to work, not lose the momentum
that has been built up, and see this thing through to
completion as expeditiously as possible.
I might also say that the Secretary has general authority
to pay above the GS scale in certain situations at his
discretion and that becomes a possibility in addition to the
differential that is established for financial regulatory
personnel.
Senator Reed. Thank you.
Let me now call upon Senator Allard, the Ranking Member.
Senator Allard. One thing that I think would be helpful to
us on the Committee here is to follow up on the recommendation
from the panel of experts that you had there.
They recommended two main options for program
administration. They recommended OMHAR or HUD's Office of
Housing. Could you explain to us what you view as the pros and
cons to each one of these options?
Mr. Hale. Certainly, Senator Allard. Actually, some of
those have been discussed.
I think the main perspective of people who favor
transferring the program into HUD's Office of Housing were well
articulated by Mr. Weicher, that they felt like it could
facilitate coordination between the office responsible for the
program and other activities conducted by the Office of Housing
that deal with multifamily properties covered in this program.
But the preponderance of people that were on our expert
panel, many of whom are here today, supported a continuation of
OMHAR or an OMHAR-like office that would still have resources
and expertise dedicated to the administration of the program.
And as Mr. Weicher said, and also Mr. Peppercorn, I think given
the complexity of this program and the difficulty of carrying
out the restructuring actions under it, it is important to have
staff that are dedicated to the program and understand it and
have the capabilities to complete these actions.
Senator Allard. Mr. Peppercorn, how long do you think we
need to reauthorize the Mark-to-Market Program?
Mr. Peppercorn. Three years seems to be a reasonable
number. When you project out the deal expirations, most of them
will have come in by that time.
Senator Allard. Are you of the view that this is something
that we will have to have in place permanently that will always
have a restructuring need out there?
Mr. Peppercorn. I think Congress did a pretty wise thing by
saying that a particular office has a sunset date. I think it
is a better idea to extend for 3 years, as opposed to
permanently, and then come back at the end of 3 years again and
say, do we need this now or are we done?
Did I answer your question, sir?
Senator Allard. I think you did, yes. Not directly, but
certainly indirectly.
[Laughter.]
Now, your estimates also indicate the number of
restructurings will steadily decline with time.
Mr. Peppercorn. Yes.
Senator Allard. What do you think should be OMHAR's need as
far as budget and staff members?
Mr. Peppercorn. It is going to be about the same for a
while because it has taken a little over a full year to
complete. So that means that even if they are coming in at
about the same level, or even with a slight decrease in the
next year, it is still going to take 1 or 2 years for that work
to taper off.
I would say, for the most part, the number is pretty close.
We are actually authorized for 101. We have tried to be
efficient. We are only in the 80's at this point in time.
Let me also point out that if in fact the work goes down,
there are ways in which the skills and talents of the people in
this office can be used. You have people who really understand
real estate, that understand how to set markets that could
potentially do other work-outs.
So if for some reason the workload drops off, I think the
Secretary and the Commissioner have a terrific team that could
potentially be deployed for some of the other needs in the
organization.
Senator Allard. I would like to turn now to the General
Accounting Office. I do not know which one of you would need to
answer this question. But I would like to have your view on the
length of time for reauthorization. And then your view on
administering the office and the number of employees.
Mr. Guerrero. I think the consensus seems to be around 3
years and we would support that. We think that is a reasonable
number. There is also merit to having that a firm 3 years
because it encourages the parties to come to the table, knowing
that there is an end to this process and that entering into the
process sooner than later is to their mutual advantage.
The resources--we do not really have any particular view as
to what that would entail, but we could get back to you on the
record with some estimate of what resources would be required
for that extension.
Senator Allard. Mr. Chairman, I know that I am running
short of time, but I have just one more brief question here, if
I may, for Mr. Peppercorn.
Senator Reed. Yes, go right ahead.
Senator Allard. Thank you. Would you explain to me in a
little more depth about these properties where we had rent
adjustments. There seems to be a general feeling that they
should have had total debt restructuring, and just what is
going on in those properties.
Mr. Peppercorn. Absolutely. It is probably the most
difficult problem that we face. When MAHRA was created, what
happened was, in addition to requiring that rents are reduced,
there were also other restrictions that were put on the
property. For instance, the moment you had a dollar written off
into a second mortgage, the proceeds of the cash flow had to be
split, 75 percent going back to the Federal Government, 25
percent going to the owner.
Second, any rehab needs, the owner had to come up with 20
percent in cash of those costs.
Third, and we have adjusted this somewhat, they were asking
to be extended out for 30 years. We were asking them to extend
out for 30 years. They were only getting back a Section 8
contract of 1 to 5 years.
What that created was a dynamic where many owners simply
did not want to participate. They did not want to lock into
their cash flow being so constrained. They did not want to lock
into 30 years. And so, what they did was they tried, in
essence, to say, we will take the Lites. We will get our rents
reduced. Leave me alone.
What has happened, though, is in certain cases, the
property cannot be sustained, in our belief, sufficiently to
keep that going.
What are the options at that point?
We cannot go in and force the owner to accept a debt
restructuring. We cannot legally go in and take the property
away. So when an owner says no, I do not want a full debt
restructuring, for whatever reason, it creates the most
difficult problem we are facing, which is, we now have a legal
obligation to reduce the rent. We know that the property really
needs a debt restructuring. The owner will not agree. And then
the question is, what do you do?
The system that has been created, and we have worked with
both Housing and the GAO on, is a system called a Watchlist.
There is no one I know that is completely comfortable with the
way that is working. We all know it is a challenge. We are
absolutely open to ideas on how to make it better, how to fix
the problem, because you are putting your finger on exactly the
most important and most difficult problem we are facing.
Senator Allard. Yes, and I am struggling with that myself,
and I was hoping you would have some suggestions.
Thank you, Mr. Chairman.
Mr. Peppercorn. Thank you.
Senator Reed. Thank you, Senator Allard.
Senator Sarbanes.
Senator Sarbanes. Thank you very much, Mr. Chairman.
Mr. Peppercorn, first of all, let me say that the Members
of the Committee share your generous evaluation of Senator Bayh
and we were pleased to hear it. We will commission the staff to
make sure that he hears of your very kind remarks here this
morning.
[Laughter.]
Mr. Peppercorn. Thank you.
Senator Sarbanes. Mr. Weicher, we are pleased to have you
back, now confirmed as the Assistant Secretary. I thought we
had an interesting nomination hearing. In fact, I thought it
was very useful and very helpful, and perhaps, although you
were on the hot seat for a while, perhaps a good example of how
a nomination hearing can be very helpful in terms of clearing a
nominee and developing some policy.
Is it the Administration's intention to actually submit to
us a piece of legislation? Are you just going to give us ideas
of what you think should be done, or is it your intention to
actually send us a draft bill?
Mr. Weicher. It is our intention to send you a draft bill.
It may not be a long draft bill, but it is our intention to
send you one.
Senator Sarbanes. All right. Now I was looking at your
statement, where you say, ``There appears to be general support
for an extension of the restructuring authority beyond the
current scheduled expiration date.''
Do you see where I am?
Mr. Weicher. Yes, Senator.
Senator Sarbanes. Then you go on to say, ``The
Administration will be submitting legislative recommendations
on how best to proceed with that extension.'' I reread that
sentence three or four times. I was kind of looking for the
word after submitting, like soon, promptly----
[Laughter.]
In the near future, post-haste.
[Laughter.]
I did not find it. What is your response to that?
Mr. Weicher. Senator, I think you are a careful reader.
[Laughter.]
Let me say that we will be submitting legislative
recommendations as quickly as possible.
[Laughter.]
And let me say also that the Subcommittee has made clear
that it would like those recommendations as quickly as
possible.
Senator Sarbanes. Let me underscore that with this
observation. I will put a question to the GAO people.
It is my understanding, at least from general reports, that
the staff that has been assembled at OMHAR, although they have
had some slowdown in getting going, but now they are going, and
that there is generally respect for the quality and the
competence of that staff. Is that correct?
Mr. Guerrero. I think that is a correct assessment.
Senator Sarbanes. Now, Mr. Peppercorn, what is going to
happen to that staff if we run up toward the end of the fiscal
year and there is not a reauthorization, and come September 30,
you are confronted with sort of a drop-dead problem?
Mr. Peppercorn. They are worried. I mean, we talk
regularly. They are comforted by what Commissioner Weicher and
the Secretary have said in terms of their intent and what
everybody believes will happen.
But as somebody said to me in one of our regional offices
last week, well, we know what you think, Ira. We know what they
think. We know the direction it is going to go in. But I have a
mortgage to pay and kids to feed. So the closer and closer you
get to September 30 without a formal renewal, the more
difficult it is for the very talented people on the staff to
hang in there.
Senator Sarbanes. I think generally here, we share a
respect for that staff. I think the intention is to
reauthorize. And so, I think you can communicate that to them
as well.
Now, I come back to Mr. Weicher. We are on a fairly tight
timeframe here and I want to underscore that. We are in this
week and next week. There is then a break for July 4. We are
then back for a July period. And I think we should be aiming to
try to move this bill through the Senate during that period
because, at the end of that period, there is an August break.
We are not here at all in the month of August, and we come back
after Labor Day. If we do not move the bill out of the Senate
during the July period, we will be a little behind time.
Of course, the House would have to move a bill as well. You
would have to reconcile whatever differences and get something
into law by September 30. So, we really do need something from
the Administration quite quickly.
Now that may argue for you simplifying or streamlining what
you submit. Obviously, the more far-reaching it is, the more it
needs to be worked over.
I think my colleagues would agree that is the scheduling
framework within which we are now operating. We do not want to
lose these people. It seems that finally, we have a good crew
put together and they are doing a good job and we want that
process to continue along.
I feel strongly about this because there is a lot of
affordable housing out there. We do not want to lose it. Some
of this restructuring, we are in the process also of
refurbishing this housing and maintaining, sustaining the
inventory and keeping it. And we have a very serious affordable
housing problem.
Now, we discussed production at your hearing and that is a
separate issue. But at least this existing housing, affordable
housing, I think we have to place a great premium on sustaining
it in the inventory.
Senator Allard. Would you yield?
Senator Sarbanes. Yes.
Senator Allard. How are we doing on filling up your
positions, your appointments, nominations and what not? Do we
have your area where you need suggestions to set public policy
in this area? Do we have those positions pretty well filled, or
are we still struggling to get those filled?
Mr. Weicher. I believe you have two confirmation hearings
on Thursday of this week with Mr. Rosenfeld and Ms. Antonelli.
And I believe there are three others who are in the process of
nomination, or being named by the President.
Senator Sarbanes. Yes, but the remaining three, they are
not before us.
Mr. Weicher. No.
Senator Sarbanes. The ones that are before us, we will have
a hearing on.
Senator Allard. And if there is some way that we can put
those that haven't been put forward by the Administration, that
we can put them on a faster track or somehow, I think we would
all probably appreciate that so that we can move forward and
get your recommendations, get as much help on board for you,
because this is pending legislation that is going to come up
here quickly.
Senator Reed. Again, I think that Senator Sarbanes' point
is very well taken because of the schedule. We certainly would
benefit from the recommendations of the Administration. But at
some point, just because of the time schedule, we will have to
move.
Mr. Weicher. I think those are all very reasonable
statements, and I think that is a very reasonable schedule,
Senator Sarbanes, that you have set forth. It certainly seems
to me to make sense.
If this is legislation that you are trying to deal with on
September 29-30 and with detailed changes, then I think we may
all not be very happy with the outcome after the dust settles.
I think we know the schedule. We are working to get you our
recommendations as quickly as we can, and we realize the more
complicated the recommendations are, the more complicated the
legislative consideration process will be.
Senator Sarbanes. Well, I think, to sharpen it up, I think
it would be very helpful to have your recommendations by the
end of this month, or certainly into the first week in July,
which is when we are away, so that it is available to us when
we come back in, and we can incorporate it into our thinking as
we move towards a fairly prompt mark-up in July.
We not only have the problem of moving it through the
Committee, but then finding time on the Senate calendar in
order to take it up, although, hopefully, this would be a
noncontroversial piece of legislation. It would be easier to
do, to move it on the floor, without a great commitment of
time. These things have a way
of getting backed up. It would not be so serious if we were not
running the risk of losing this team that has been assembled
and
put together, which most everyone thinks is currently doing a
creditable job.
Mr. Weicher. We certainly do not want to terminate the
activities of OMHAR and we do not want them to be terminated by
inadvertence, either.
I think, Senator, you have given us a very reasonable
timetable and we will do our best to meet it.
Senator Reed. Thank you, Mr. Chairman.
Senator Dodd.
Senator Dodd. Thank you, Mr. Chairman. And that is the line
of questioning I had as well for Mr. Weicher.
First of all, let me thank all of you for being here and
testifying.
Just to explore this a bit, the timeframe, and Senator
Sarbanes and the Chairman have identified it, well, even in
July, we are looking at a series of appropriations bills which
can just consume the entire time on the floor of the Senate.
One Senator on this kind of a matter could basically kill
this, is the way I see it, with the timelines being what they
are. It is not going to take any Herculean effort here to stop
the reauthorization of this program.
And so, it becomes, I think, not only important in terms of
submission, but I would like to just explore with you, to what
extent you think this is worthwhile reauthorizing.
It seems to me that this is not de novo, and I understand
the need for having people in place obviously to help
administer. But we are not talking about the creation of an
office here. We are now talking about an established record, at
least I see an established record, and the GAO seems to confirm
that.
I realize you do not have a plan yet. I would like to
explore with you whether or not you think it has been
worthwhile.
Obviously, if the Administration in its language is not
particularly pleased with this kind of an operation, that you
have some kind of problems with it, I think it is very helpful
for us to know that today.
I can wait for your submission in July, but at that point,
I need to get from you whether or not you think this office and
this particular effort has been in the best interest of
everyone involved. Or do you think it ought to go to FHA?
I know there is a turf battle going on here a bit, but
aside from doing that, is this in your view--you are an
experienced person. This is not something we are just bringing
up to you today for
the first time. You are very familiar with it. What do you
think of
it? We can get into the details of it, but has this been
worthwhile
or not?
Mr. Weicher. Well, Senator, to expand a little bit on what
I said in my prepared statement and my opening remarks, the
Secretary has said on behalf of the Administration that we want
to extend the basic authority of OMHAR.
Senator Dodd. Yes.
Mr. Weicher. We are about halfway through a process that
you put in motion in 1997. We think that process should
continue. We do not believe, and I have not heard anyone say
this morning, that at this point, we should adopt a new
approach to deal with the last half of the properties that are
going through the system.
The questions are likely to concern the administrative
structure of the office and its relationship with the rest of
HUD and it may involve some suggestions for changes in the
specific authorities. I notice some suggestions in some of the
testimony from the second panel. But, as I also said, this is
as tough an issue as any of us are ever likely to face in HUD,
and that is saying something. There are some competitors for
that title.
But this is something that you all have been wrestling with
for years. We have a strategy that you adopted after a great
deal of hard work in 1997, and it is our view to carry that
strategy forward to conclusion.
I hope that is responsive.
Senator Dodd. It is responsive, and I appreciate that very
much.
Are you satisfied as well with Mr. Peppercorn's numbers in
terms of the cost savings that have been realized up to this
point? Or is there some debate about that?
Mr. Weicher. There is no debate on them. I have not sat
down myself and gone through the numbers. Having said that, let
me
go back and say that there is, as far as I know at this point,
no de-
bate on them. I think we all have slightly different numbers.
Those numbers change every time there is a new resolution or
restructuring.
Senator Dodd. Yes.
Mr. Weicher. And I think if you sat down and looked at the
testimony of everyone, you will see some differences.
Senator Dodd. Is there any authority which exists within
the Department, for instance, if we were unable, for whatever
reason, to adopt legislation? Is there some way the Secretary
would be allowed or could allow the office to continue in
operation for a period of 60 or 90 days, whatever, if Congress
for some reason were unable of adopting, both Houses, a bill
that the President was able to sign?
Mr. Weicher. I do not know, Senator, very simply. I hope
that if that were to happen, if we were in that situation, we
would be able to do that on some basis, but I am not a lawyer
and I am not an expert on legislation.
Senator Dodd. I might say if you would take a look at that
and let us know. That might be helpful in terms of just the
clock up here in terms of how we are functioning.
That would also get to the point that Senator Sarbanes has
raised. And again, I would just raise it here.
Have you had a chance to make any assessment of the quality
of the people in this office, Mr. Weicher?
Mr. Weicher. No, Senator, I have not. I have known Mr.
Peppercorn since he was at FHA back in 1997 and 1998. Beyond
that, as you know, I have been in office for 18 days and I have
not----
Senator Dodd. That is a long time.
[Laughter.]
Mr. Weicher. It seems longer every day.
[Laughter.]
Yet met with the people at OMHAR.
Senator Dodd. Very good. You might just take a look because
I think that point of obviously putting together this synergy
of talented people, I do not need to tell you how that works.
Obviously, you have seen it in so many different capacities in
your life. But if you lose that, it falls apart, trying to
replace it again, can get right back to the very worthwhile
critique of why this program took so long to get going. And
going back to the director of this program and then putting the
staff together. So, I think the notion that we could end up
losing some talented and bright people--the offers are out
there when you are that talented, to be able to move people
very quickly if you are in a situation where you are
vulnerable.
I think that is worth mentioning.
Finally, Mr. Peppercorn, one of the concerns we have heard
voiced is that a number of the properties with above-market
rents are not being referred by FHA to OMHAR. What is going on
there? What is the problem there?
Mr. Peppercorn. That is something that we have talked to
the Office of Housing about. The properties need to go from the
owners to the HUD field offices and then over to us. I do not
know what the reasons are. And what we do is we look at the
model and we predict which properties we think will come in and
which properties have not come in and see where there is a gap.
And we have communicated the data to the Office of Housing
and I believe that it is appropriate for them to really take a
hard look at the very question you are asking.
Senator Dodd. Well, Mr. Chairman, I notice that we do not
have anyone from FHA on our panel. You have a very complete
panel here coming up. But I wonder if we might do a letter to
FHA.
Senator Reed. Actually, Mr. Weicher is the Commissioner.
Senator Dodd. Well, I know. But do you have any reason why
that is going on?
Mr. Weicher. Senator, I do not know why that is happening
at this point. In the process of preparing for this hearing, I
became aware of this as a problem as seen by OMHAR and I have
asked our Office of MultiFamily Housing to ascertain what the
problem may be and see if we can identify for specific projects
what else we should be doing.
It is not our intention, it is not Secretary Martinez's
intention, not my intention, to delay this process because of
confusion and
bureaucratic difficulties between agencies. We do think, as I
said
in my statement, that if OMHAR is within Housing, we have
better control over the relationships between the MultiFamily
Hubs and OMHAR and between the rest of the Office of Housing.
So that we do not have complicated conversations about what is
really going on.
Senator Dodd. Fine. Yes?
Mr. Guerrero. To put some perspective on this, we observed
that only 32 percent of the expired contracts in the last
fiscal year were referred to OMHAR. A look needs to be taken,
as HUD indicated, at the reasons for why that is.
One possible explanation we heard is simply the changing
economics in certain markets. We have had a very robust economy
in certain markets. That could account for why some of these
properties when their contracts expire do not get forwarded.
Some of our panelists thought perhaps that would suggest a
need for a third party to look at the rent comparability
studies that begin this process, to ensure that they are
accurate and reflect the true market conditions, so that when
you begin the process, you are actually starting with good
data.
Senator Dodd. Yes.
Mr. Guerrero. And that would eliminate data as a potential
source of the fact that some properties that should be coming
into the system are not coming into the system.
Senator Dodd. That is a good suggestion.
Finally, Mr. Chairman the statute requires the tenants--for
you, Mr. Peppercorn--that significant stakeholders be involved
in the restructuring process. I guess the question that I would
ask you is: Are the PAE's meeting this requirement?
Mr. Peppercorn. I think for the most part the answer is
yes. I know from an OMHAR policy point of view, the answer is
absolutely yes.
There have been cases that have been brought to my
attention where the PAE was not paying good enough attention to
tenant issues. Some of the things we have heard in particular
were that tenant meetings were scheduled during the day on
family properties. That means that people cannot go. Every
single time we have heard an issue like that, we have stepped
in. Some of this was a learning curve on the part of the PAE's.
Moreover, about 2 weeks ago, we brought in PAE's and tenant
groups and OMHAR staff and housing staff from around the
country to have a training session, to have people share their
experiences honestly.
And my sense of things is, it is not perfect but it is
pretty good.
Senator Dodd. Did GAO look at that at all?
Mr. Hale. Yes, Senator Dodd. Actually, when we had our
expert panel back in February, that was an issue that came up.
We had representatives from tenant groups there, as well as
OMHAR. And they expressed some concerns about just the things
that Mr. Peppercorn was talking about, about meetings not being
held appropriately, tenants not getting notification.
And actually, since then, we have followed up a couple of
times and to OMHAR's credit, they have had a couple of
additional conversations where they did bring in
representatives, most recently a couple of weeks ago, from the
tenant groups and from a number of PAE's to talk about these
issues. So that is positive.
Having said that, it is still going to be an ongoing
situation that OMHAR obviously will need to stay on top of to
make sure that the tenants do get a chance to participate.
Senator Dodd. Thank you very much.
Thank you, Mr. Chairman very much.
Senator Reed. Thank you, Senator Dodd.
Thank you to the panel.
There may be additional questions which we would solicit in
writing. And I would urge you to promptly respond so that we
can move this process forward.
Thank you very much.
I would now like to call up the next panel, please.
Before introducing the second panel, I would like to yield
to Senator Sarbanes.
Senator Sarbanes. Thank you very much, Mr. Chairman.
Unfortunately, I am going to have to leave for a
conflicting engagement. I do want to thank the people on this
panel. I have had a chance to look through their statements and
obviously, a great deal of work has gone into them. And there
is really a great deal there that I think is beneficial to the
Committee, and I am most appreciative for that contribution. I
apologize that I am not going to be able to stay to hear the
testimony. I do want to make two observations, Mr. Chairman.
First of all, I want to observe that the National Leased
Housing Association is quick on the beat. I see that they have
John Bentz, who is one of the directors of the association, to
give their testimony today. And it just so happens that Mr.
Bentz is from Providence, Rhode Island.
[Laughter.]
Senator Reed. Coincidence.
[Laughter.]
Senator Sarbanes. And I also want to observe that the Mercy
Housing people are here with Mr. Wehrwein, and that their
headquarters is in Denver, Colorado.
Senator Allard had to leave us for a brief period, but I am
glad to see a panel that is staying abreast of the times, Mr.
Chairman.
[Laughter.]
Thank you all very much.
Senator Reed. Thank you, Mr. Chairman.
Let me first introduce the panel formally and then we will
begin with Mr. Wehrwein.
John Bentz is from my own home State of Rhode Island. John
is here on behalf of the National Leased Housing Association,
of which he is a Director. He is also Cofounder and President
of Property Advisory Group, which manages approximately 2,100
housing units in five States and is based in Providence, Rhode
Island.
Mr. Bentz is Past President of the Rhode Island chapter of
the Institute of Real Estate Management and is currently
serving as the Chair person of the Legislative and Emissions
Committee. He is both a certified Property Manager with the
Institute of Real Estate Management and a registered Apartment
Manager with the National Homebuilders Association.
Thank you, John, for joining us today.
Ms. Geraldine Thomas is the current Vice President of the
National Alliance of HUD Tenants and has been a resident of
HUD-assisted multifamily housing since 1988. She is Chair of
the
association's mark-to-market task force, which consists of
local
affiliated groups for providing outreach and training service
to tenants in mark-to-market properties in 25 States. Ms.
Thomas has been a board member of the National Association of
HUD Tenants since 1997, and served as the association's Vice
President since 1998. She was honored in June 2001, by the
National Association of HUD Tenants Conference with the
organization's Outstanding Organizer of the Year Award.
She is an active member of her community and we thank her
for being here. Her community is in the Philadelphia area. Is
that
correct?
Ms. Thomas. Yes.
Senator Reed. Thank you.
Barbara J. Thompson is Director of Policy and Government
Affairs for the National Council of State Housing Agencies. She
is representing the publicly Participating Administrative
Entities. She oversees the work of the legislative and program
staff on regulatory issues related to affordable housing,
including banking, tax, budget, appropriations. Ms. Thompson is
responsible for keeping member finance agencies informed of
Congressional activities. She has served in the New Jersey
Governor's Washington office as a senior housing lobbyist under
two administrations, former Governors Tom Keane and Brendan
Byrne.
Cathy Vann is representing the private PAE's. She is the
President of Ontra, a participating administrative entity for
OMHAR. During her 15 years' tenure at the Ontra companies, Ms.
Vann has been involved in the due-diligence, asset management
and disposition of more than $8.5 billion in distressed
mortgage and real estate assets in 45 States and Puerto Rico.
Ontra, as a private PAE in the Mark-to-Market Program, has
been awarded 118 full debt restructures, 120 rent restructures,
and 22 comparability reviews since their July 1999 contract
inception.
And we thank her for joining us.
Finally, Mr. Charles Wehrwein is the Vice President of
Mercy Housing, one of the largest nonprofit developers, owners
and managers of service-enriched affordable housing in the
United States. His responsibilities include leading Mercy's
acquisition initiative, which is focusing on acquiring and
preserving portfolios of existing affordable housing complexes
across the country.
Mr. Wehrwein also oversees the Mercy loan fund and the
Mercy housing development division. And prior to joining Mercy,
Mr. Wehrwein served in various capacities, including Chief
Operating Officer with the National Equity Fund, the largest
nonprofit syndicator of low-income housing tax credits.
And he has had previous experience in the Federal
Government at HUD, and we thank him for joining us today.
Mr. Wehrwein, would you begin, please?
Senator Allard. Mr. Chairman, I would just like to
personally welcome Mr. Wehrwein to the Committee and we look
forward to his testimony.
Senator Reed. Thank you, Senator.
STATEMENT OF CHARLES WEHRWEIN, VICE PRESIDENT
MERCY HOUSING, INC.
Mr. Wehrwein. Thank you, Mr. Chairman, and Senator Allard,
for your kind words.
I wanted to say that my comments also reflect the input of
several other significant community development organizations,
including the National Housing Trust, LISC, the Housing
Partnership Network, and NEFPI.
Mr. Chairman, Mercy Housing and others in the community
development field regard the preservation of affordable rental
housing as essential to the stability and revitalization of
communities and the residents who so desperately need this
housing, both now and in the future.
Before commenting on the specific issues and policies
around the mark-to-market subject, I would like to share with
the Subcommittee a specific example of mark-to-market in
action, if I may.
Mercy Housing owns a 106 unit Section 8 assisted property
in Denver, Colorado. This property serves the transitional
housing needs of distressed families. Our Section 8 contract
expired and we were eligible for mark-to-market, and we have
entered that process and expect to close on our transaction
within the next month or so.
An example of a typical resident at Decatur Place, which is
the name of this property, is Caroline Garcia. She and her four
children escaped an abusive relationship with nothing more than
the clothes on their backs. She had no education when she
arrived at Decatur Place. Her first month there, she was only
able to contribute $4 per month toward the rent at the
apartment. She immediately went to work part-time at the
cafeteria where her children attended school. She took life
skills training provided by Mercy on-site, including parenting,
financing and computer training, and she began her education
process. In just 2\1/2\ years, she has completed her education
and is now working full-time as a medical tran-
scriber. Her children are healthy and strong, and doing better
in school than they ever have, and she is now contributing $386
a month toward rent. Were it not for the Mark-to-Market
Program, this property could not have been sustained at this
level.
As to the progress of restructurings, clearly, they began
far too slowly. But I think now have picked up dramatically. In
our view, it is solely because of the new owner and nonprofit
incentive guidelines that were adopted by OMHAR in the fall of
2000. They were created through a cooperative approach that
brought together stakeholders from across the spectrum. It has
been a great example of how Government should work.
These new guidelines, among other things, have encouraged
the nonprofits to pursue purchases of mark-to-market properties
and owners to submit to the mark-to-market process.
Prior to these guidelines, it was simply uneconomic to take
on these properties. We applaud OMHAR's recognition of the risk
of additional affordable housing losses in their response to
this problem. Without these incentives, we believe that full
restructurings would not have commenced at the pace that they
currently have.
Extending the authorities present under MAHRA will allow
sufficient time for the backlogs of these complicated
transactions to be completed. It will send a clear and strong
message to the entire housing community that Congress is
committed to sticking with a consistent program once it works.
We strongly support the extension of authorities beyond
their scheduled expiration at the end of fiscal year 2001, and
we recommend that Subtitle A, of MAHRA be extended.
Furthermore, we strongly encourage the Subcommittee to
recognize and affirm the importance of the new incentives and
guidelines implemented by OMHAR, as they are critical to the
recent success of the Mark-to-Market Program. Finally, we
specifically call for the Subcommittee's attention to the need
for continued funding of ITAG and OTAG grants at levels equal
to or exceeding last year's $10 million.
I would like to turn my comments now toward the experience
of working with OMHAR and its team members.
OMHAR was clearly slow getting out of the gate, as you have
heard, both in organizing its operations and in contracting
with the PAE's. Creating an organization from scratch is
difficult and time consuming under the best of circumstances
and it seems in hindsight that a period of 3 years to both
create the organization and complete all the restructurings was
optimistic at best.
Experience with OMHAR's national office staff and
consultants suggests that they are extremely competent from a
technical standpoint and they reach out and seek information
and guidance from many stakeholders.
The assessment of OMHAR's field staff is somewhat more
variable, the largest problem being the communication of their
national policies and the assurance that those are being
carried out.
Experience with public PAE's has been very positive. My
personal experience with the Housing Finance Authorities in
Colorado and Missouri have been outstanding. Overall, the staff
at the public PAE's seems competent and professional and the
public PAE's seem to have a better understanding on how to
appropriately strike a balance between cost savings and quality
affordable housing.
From a programmatic standpoint, we would like to see a more
direct linkage between the HFA and other State and local
housing resources and preservation, and would strongly support
new funding allocated to the States to accomplish this goal.
The Federal matching grants provisions of the legislation
proposed in H.R. 425 and proposed in the past by Senators
Sarbanes, Kerry and Santorum would be an excellent vehicle to
accomplish the linking of State and Federal resources and we
would strongly support that.
Experience with the private PAE's has also been fairly
good, although, again, the communications issue seems to be a
bit of a problem. Their nature as profit-motivated entities
sometimes pushes them to focus more on the cost elements than
the quality elements of housing in their locales.
In conclusion, whatever the reasons for the delays in
getting OMHAR off the ground, it is now working. It is a
singular business-like unit in the Federal Government that is
competent and improving and it would be a waste of the
taxpayers' resources invested to date, to let it expire, or
otherwise reconfigure it, just as it is beginning to reach its
potential.
The work that it was created to do is not yet done. It is a
small, lithe organization with specific technical skills that
allow it to be responsive to stakeholders and objectives judged
by Congress. Therefore, I urge you to extend the OMHAR
organization in its current configuration by extending Subtitle
D of MAHRA.
Thank you, Mr. Chairman. That concludes my testimony.
Senator Reed. Thank you very much, Mr. Wehrwein, not only
for the substance of your testimony, but also for your length.
If I could urge everyone to stay as close to 5 minutes as
possible, it would be appreciated. We want to have time for
questions.
Your written statement will be included in the record if
you want to summarize also.
Ms. Thompson, please.
STATEMENT OF BARBARA J. THOMPSON
DIRECTOR OF POLICY AND GOVERNMENT AFFAIRS
NATIONAL COUNCIL OF STATE HOUSING AGENCIES
Ms. Thompson. Thank you, Mr. Chairman.
Mr. Chairman, I am Barbara Thompson, Director of Policy and
Government Affairs for the National Council of State Housing
Agencies.
The NCSHA represents the Nation's State Housing Finance
Agencies. Rick Godfrey of your own State of Rhode Island, Mr.
Chairman, serves on NCSHA's board and is a member of its
Executive Committee.
Thank you for this opportunity to testify about the Section
8 restructuring program and the experience of HFA's serving in
it. First, though, Mr. Chairman, I would like to thank you and
Senator Allard and the many Members of this Subcommittee who
cosponsored and helped enact legislation in the last Congress
to increase the caps on housing bonds and the Low Income
Housing Tax Credit.
Unfortunately, even with these increases, many qualified
for bonds and credit help simply will not get it. Three
obsolete program provisions prevent it.
Senate bill 677 fixes these problems. We would appreciate
your cosponsorship and that of your Subcommittee colleagues,
and ask you to encourage your leadership to please include it
in a tax bill this year.
NCSHA and the Nation's State HFA's worked very closely with
the Congress to create the restructuring program. With the
support of Congress and the industry, we assured that qualified
HFA's had a priority right, Senator, to serve as restructuring
agents. We knew that HFA's would carry out restructurings in a
manner that protects the interests of the Federal Government
and at the same time, the properties, the residents, and the
surrounding communities. Regrettably, OMHAR has failed to
utilize the expertise of HFA's. Instead, OMHAR has treated
HFA's as robots, prescribing their every move, stifling their
judgment and their creativity.
Accordingly, though we urge the Subcommittee to reauthorize
the restructuring program, we encourage you to turn its
responsibility, responsibility for its administration, over to
HUD. We also recommend that you direct HUD to streamline its
many, many rules and regulations and devolve greater
decisionmaking to the State HFA's, as Congress always intended.
State HFA's have been strong and successful partners with
the Federal Government when it has permitted them to do their
job with their own expertise and experience.
Congress intended States to have decisionmaking authority
and flexibility when it gave them the priority to serve as
PAE's. Chairman Bond at the time said:
Devolving responsibility and decisionmaking to the State and
local level is one of the primary goals of this Mark-to-Market
legislation.
Senator Mack, author of the legislation, said:
I expect HUD to approve many HFA's as PAE's and provide them
as much flexibility as possible within appropriate parameters
to administer the (permanent) program.
However, OMHAR either never understood that or chose to
ignore Congress' will. Instead, it chose to do the
restructuring work. From the start, OMHAR has dictated down to
the finest detail every step HFA's must take in restructuring
properties. It has denied HFA's the ability to apply the very
expertise, judgment, knowledge of their local markets, concern
for their properties and communities and tenants, that caused
Congress to choose them to do this work in the first place.
Despite Congress' many admonitions about streamlining the
program and utilizing HFA's, OMHAR changed little until the
Senate Appropriations Committee last fall told them that its
functions would be transferred to HUD. Since then, OMHAR has
made some progress, but too little, in our opinion, and very
late. Though it finally reduced the requirements of its
operating procedures guide, the changes it contains still do
not go nearly far enough toward streamlining and simplifying
the program.
OMHAR continues to value process over product, rules over
results. Its guidance to PAE's remains overly prescriptive,
confusing, needlessly complex, ever-changing, and
inconsistently interpreted and applied by its own staff. Its
operating guide, Senator, has 22 separate appendices and
requires the use of 86 separate forms to process a single
transaction. OMHAR issued 79 ``policy'' emails to PAE's in just
the last 14 months. Its financial model, which PAE's must use
to calculate the necessary financial outcome in a
restructuring, is over 40 pages long and unnecessarily complex.
It leaves little room for State judgments.
OMHAR runs a command and control operation. It delegates
little authority to its regional offices. Frequently, the
regional office will tell an HFA one thing, while the
headquarter office tells them another. Communication between
OMHAR and HUD is very poor. PAE's are bounced back and forth
between OMHAR and HUD for decisions and information.
Many HFA's find OMHAR more interested in saving money than
in preserving properties. OMHAR frequently questions HFA market
rent and rehabilitation needs assessments, despite its lack of
familiarity with the properties and the communities within
which they are located.
Policymakers, Senator, will for some time debate the number
of Section 8 properties lost and the Federal subsidy savings
forfeited due to OMHAR's insistence on doing it its way. But
there is another cost--the loss to the restructuring program of
State HFA expertise, judgment, experience and commitment to
public purpose.
Of the original 42 State HFA's approved as PAE's, only 22
remain in the program today. Some HFA's never signed contracts,
believing they could add little value given OMHAR's
prescriptive
approach. Others have declined to renew, severely frustrated
with OMHAR's unreasonable and irrational rules. Still others
have been forced out by OMHAR often without explanation. Some
remain, but are inactive because OMHAR doesn't give them
assets. It gives them instead to the privates without the
knowledge of the HFA or their agreement as the law requires.
Your own agency, Mr. Chairman, one of the strongest in the
country, last April received written notice from OMHAR that it
would not renew its contract. That notice gave no explanation
for the termination.
Mr. Chairman, Congress wrote the right plan when it gave
priority to public PAE's to carry out Section 8 restructurings.
The problem is OMHAR never implemented that plan.
You have an opportunity to insist on the system that you
established nearly 4 years ago, a system under which the
responsibility for restructuring Section 8 properties is
delegated to willing and capable State and local agencies with
reasonable Federal oversight and accountability to the Federal
Government, the States, communities, and residents.
Thank you very much, Mr. Chairman, for this opportunity to
testify and CSHA and the State HFA's are committed to working
with you to set the Section 8 restructuring program on the
course Congress intended.
Senator Reed. Thank you, Ms. Thompson.
John Bentz. John, good to see you here.
STATEMENT OF JOHN BENTZ
PRESIDENT, PROPERTY ADVISORY GROUP, INC.
DIRECTOR OF THE NATIONAL LEASED HOUSING ASSOCIATION
We thank you for the opportunity to appear before you
today.
Mr. Bentz. Same here. It is a pleasure, Senator. I
appreciate Senator Sarbanes' comments relative to the
timeliness of my visit to this Committee. And I appreciate your
hearing me today.
My name is John Bentz. I am President of Property Advisory
Group in Providence, Rhode Island. I am a Director of the
National Leased Housing Association, on whose behalf I testify
today.
As a matter of background, for the past 30 years, NLHA has
represented the interests of owners, lenders, housing agencies,
and others involved with Section 8 programs, both project-based
Section 8 and tenant-based vouchers.
My company alone owns 18 Section 8 properties throughout
the country and we currently have several properties undergoing
process in the Mark-to-Market or Section 8 renewal program, as
they are called.
Today, we will focus our comments on the future of OMHAR
and the Mark-to-Market Program. Both issues are of great
concern to NLHA members.
The expiration of OMHAR authorization on September 30
raises the question of whether the entity is to continue. It is
generally recognized that OMHAR got off to a slow and rocky
start and did not hit its stride until about a year ago. The
program was new, OMHAR was not fully staffed, and owners were
naturally wary of a program that could have significant
negative consequences to the projects and to their investors.
However, at this time, OMHAR appears to be functioning on a
higher level. Nearly 140 mortgages have undergone full debt
restructuring with 25 to 30 restructurings expected to close
each month through September.
Under the direction of Mr. Peppercorn, OMHAR itself has
made significant reforms to make restructuring more attractive
to owners. These reforms include the possibility of enhanced
assessments and project management fees, and allowing interest
on the owners' required deposits to reserves as an eligible
project expense. In other words, OMHAR has shown that it does
listen and responds to concerns raised by the stakeholders.
At this point, the termination of the Mark-to-Market
Program does not appear to be practical. Because of the high
cost of Section 8 subsidies, a replacement mechanism would be
needed to develop with no promise of anything better. The
question does arise, however, as to whether or not OMHAR should
be continued in its present form or whether the Mark-to-Market
Program should be melded into HUD's regular multifamily
programs.
My opinion is it should be kept separate.
NLHA feels that OMHAR must retain its functional
independence in order to retain its current capacity to process
debt restructuring. OMHAR has attracted some very talented and
experienced staff members. We believe that their retention is
essential to the continuation of the Mark-to-Market Program to
avoid causing fatal interruptions. I think this has been
discussed at great length in the previous discussions.
We would caution against dismantling OMHAR and simply
folding the Mark-to-Market activities into HUD's regular
multifamily marketing program responsibilities.
Implicit in our belief that OMHAR should be retained is our
view that mortgage restructuring mechanisms as adopted in 1998
should continue as long as Section 8 rents are to be based on
comparable market rents.
I believe Mr. Peppercorn mentioned FMR's--are they fair and
are they marketable? Sometimes it is debatable.
There are 400 properties that are anticipated to be
eligible for debt restructuring in fiscal year 2002 alone.
Without the legislative authority to restructure the debt on
these properties, the FHA insurance fund will be forced to
absorb a high level of mortgage defaults when properties
undergo a rent reduction with unsatisfactory burdens being
placed on owners and residents.
Although OMHAR has been responsive to a number of
suggestions from the housing community, there are other changes
that could be made to improve the program. Most would require
changes to the statute.
In recognition of our time limitations, I will not explain
them in any detail, but simply say that amendments should be
made to address: One, owners contributions to rehabilitation
costs; two, the inadequacies of market rents in some inner-city
neighborhoods and rural areas, which are a very important item;
and three, needed flexibility in certain HUD mortgage programs
to improve the Mark-to-Market Program.
Our written testimony provides more details on these issues
and NLHA's members are developing more significant legislative
recommendations this week which we will provide to the
Subcommittee staff.
I thank you for this opportunity to testify this morning.
Senator Reed. Thank you very much, Mr. Bentz.
Now, I will call on Ms. Vann.
STATEMENT OF CATHY VANN
PRESIDENT, ONTRA, INC.
Ms. Vann. Thank you, Mr. Chairman.
I am presenting this testimony today as the President of
and on behalf of Ontra, Inc., as a private PAE for OMHAR. To
place my testimony in perspective, during Ontra's 16 year
tenure, we have had significant experience dealing with
distressed Government assets. The $8.5 billion in assets that
we have managed through that 16 years have been with the likes
of Texas Housing Agency, FSLIC, FADA, FDIC, RTC, and numerous
Texas banks and S&L's, including Southwest Plan Institutions.
In the early 1990's, Ontra received ``above average''
ratings from all four Wall Street Investor Rating Agencies to
facilitate its participation as a Special Servicer and equity
partner in over $2.5 billion in distressed mortgage and real
estate asset acquisitions with AIG, Citicorp, CS First Boston,
and Goldman Sachs. About $1 billion of these assets were in a
partnership with the Federal Government through the RTC S and N
Series program.
Ontra commenced its contract with OMHAR in July 1999 as one
of the first two private PAE's. They were assigned 120 Rent
Restructurings, referred to as Lites, 118 Debt Restructurings,
referred to as Fulls, and 22 Comparability Reviews, for a total
asset count of 260.
In the interest of time, the detailed results are provided
for the written record. But to summarize, Ontra has completed
112 of the Lites, 83 of the Fulls, and 21 of the 22 Comp
Reviews, for a total of 216 assets that have been either
resolved, closed or completed. The statistics of my report are
based on these numbers.
In order to provide the services for this contract, Ontra
management has historically dedicated 23 individuals to the
delivery of the required services and currently has 16 staff
members fully engaged in the process.
Much of the remainder of my testimony, the nonstatistical
portion, represents the results of my canvassing effort in
February of the eight other private PAE's in response to a
request from the GAO to participate in a panel regarding the
disposition of OMHAR in the Mark-to-Market Program.
Regarding the progress in rent and debt restructurings, as
everyone has said, it had a slow start. But from the private
PAE's perspective, there were two essential drivers to this.
For the first 12 to 18 months, owners appeared disengaged
and largely convinced that if they stalled, the Mark-to-Market
would go away and in all fairness, there was little incentive
for the owners to participate willingly in the program, given
the financial structure at that time. The owner's incentive
package which was in-
troduced in September 2000, has gone a long way to cure this
problem. Since January 2001, there has been gaining momentum in
the owner community to contemplate, comprehend, and finally,
engage the program.
Of Ontra's 195 completed Lites and Fulls transactions, and
that includes resolved assets, there were only four opt-outs on
Fulls and five opt-outs on Lites. Opt-outs are where the owner
has chosen to just completely leave the affordable housing
program.
The program is very complex. That is the second driver, the
complexity of the program. And I want to stress here that, with
all the criticisms of OMHAR, we have a completely different
perspective. We think the program is complex. We think OMHAR's
response to it has been appropriate.
The following comments I would like to keep in that
perspective. There has been significant ramp-up and learning
curve maturation involved. The following items will speak to
this complexity issue.
The heart of the Restructure Transaction has a 45-page
model which includes not only all of the MAHRA business rules
written in, but 14 different analytic schedules. There is eight
standard real estate mortgage analysis schedules, such as
operating budget analysis, long-term capital reserves, debt
sizing, amortization, claim sizing, net savings. It includes an
additional six schedules to analyze Tenant versus Project-based
subsidies, IRP recaptures, Out-year HAP contract recaptures,
affordability restrictions, exception rents, and an analysis of
the anticipated repayability of the partial payment of claim,
all in one integrated proforma.
This is a very valuable tool. It is complex, but it is
valuable. And I do not know how we could accomplish what we
have accomplished without this sort of tool. Going further on
more complexity.
There is a minimum 26 individuals involved, and sometimes
as high as 41 we have counted in a single transaction that have
to
be notified, coordinated, copied and satisfied, including four
to five
individuals at OMHAR, two to three at HUD, and numerous
others such as local housing authorities, owners, property
managers, tenants, OTAG's, PCA Consultants, and Appraisers, old
lenders, new lenders, four different sets of attorneys and
title company personnel.
Once again, that is not an issue that is driven by OMHAR.
That is the nature of the beast. That is what it takes to
complete a transaction with all the parties, as what we believe
the Government has intended us to do.
There are four different closing scenarios. There are
different rules and regulations for each of them, the most
common of which is a 223(a)(7), in which there are 55 distinct
documents, 8 signatories, and 14 distribution parties.
However, in the last 24 months, all of these bases have
been effectively covered. The long awaited momentum is
currently being achieved. And note that the average time
between acceptance and close for a standard Full Debt
Restructuring, at least for this PAE, has gone from 15 months
for assets assigned prior to January 2001 to 7 months for
assets assigned after January 2001, representing a 114 percent
improvement.
Regarding the savings to date generated for the Federal
Government, based on Ontra's portfolio, there has been an NPV
savings on 119 completed and closed Lites and Fulls
transactions of approximately $106.3 million of which $63.8
million represented 79 Lites, and that included 19 Fulls that
went to Lites. And there is $42.5 million which represents 40
closed or completed Fulls.
The estimated PAE costs to date, at least from our
perspective, is about 3 percent of the NPV savings.
Regarding the physical condition of the housing stock, we
looked at this from two perspectives. The status of the stock
as it came into the program or as it was assigned to us as a
PAE, and then the long-term preservation dollars.
As far as the deferred maintenance which was the status of
the housing as it entered the program, the program calls for
escrowing funds to cure immediate repairs within 12 months
after closing.
The repair escrow rehab numbers for Ontra's 31 closings,
and we have 21 imminently pending closings which will close in
the next 30 to 60 days. Of these 52 assets, we have escrowed
almost $5.3 million on 4,683 units, 52 projects, which amounts
to about a little over $100,000 per project and about $1,100
per unit. But these numbers are somewhat skewed because five
inner-city properties represent about 3 million or 60 percent
of this total.
When you look at it overall, deferred maintenance in our
portfolio has not been a significant issue.
However, the housing is aged. So from a long-term
perspective, the same set of 52 assets closed and pending. The
program has allowed us for set-asides of approximately $57.5
million, averaging just over $12,000 a unit to cover the 20
year long-term capital needs. This represents an average of
about $614 per unit per year set aside for replacements.
One of the more compelling statistics is that the average
reserve deposit prerestructure went from approximately $309 to
$439 postrestructure, which represents a 42 percent increase in
annual reserve deposits to the replacement reserve accounts.
These numbers seem to point to the fact that although it
appears that not
all of the housing is in terrible shape, but that the program
is
providing a unique opportunity to reconfigure the economics and
provide for the stabilization, if not the rejuvenation of aged
housing stock and thereby ensure quality affordable housing
into
the future.
Regarding the operations of the Office of MultiFamily
Housing Restructuring Assistance, in summary, on this issue, I
hope that my entire testimony speaks to the fact that the
program is very complex by nature. It has achieved definite,
significant momentum. And it is providing solid savings while
at the same time capitalizing on a unique opportunity to set
the economics straight for the Nation's FHA insured Section 8
housing stock, and to ensure continuance, at least in this
sector, of quality affordable housing.
OMHAR has been integral to this process and despite the
criticism to the program and OMHAR's implementation of such it
is my company's opinion that OMHAR has done an admirable job
of juggling the priorities of the numerous stakeholders and the
parties to the transactions, while at the same time developing
well proportioned tools to manage the delivery of a very
complex program. There are three additional items I wanted to
address very quickly on a going forward basis.
Senator Reed. Could you summarize very quickly, Ms. Vann?
Ms. Vann. Okay. These are okay because they have been said
before.
Senator Reed. Thank you very much.
Ms. Vann. Thank you.
Senator Reed. Ms. Thomas.
STATEMENT OF GERALDINE THOMAS, VICE PRESIDENT
NATIONAL ALLIANCE OF HUD TENANTS
Ms. Thomas. Thank you, Senator Reed.
On behalf of the National Alliance of HUD Tenants, I am
pleased to submit these comments on the Mark-to-Market Program.
The National Alliance of HUD Tenants, or NAHT, is the Nation's
first membership organization representing the 2.1 million
families who live in privately-owned, HUD-assisted housing. Our
membership today includes tenant groups and area-wide
coalitions in 30 States.
I want to thank you and the Subcommittee for the honor of
speaking before you today.
Since 1999, NAHT has convened a monthly Mark-to-Market Task
Force, which I chair, consisting of the tenant coalitions among
NAHT's membership working in the mark-to-market buildings.
The comments we submit today reflect the consensus views of
these NAHT affiliated groups, based on their experience with
the Mark-to-Market Program on the ground in more than 20
States.
In the interest of time, I refer the Subcommittee to our
written statement which explains why many owners have avoided
the Mark-to-Market Program or opt for 1 year Section 8 contract
renewals and rent reductions, known as OMHAR Lites. I will say
though, that the main reason for the low level of owner
participation in the mark-to-market was the decision by
Congress to make owner participation entirely voluntary.
With a boom economy, owners in many parts of the country
have few reasons to go into mark-to-market and restrict their
chance to make more money for 30 years.
As long as Congress is unwilling to require owners to renew
their expiring Section 8 contracts or to regulate rents for
assisted housing, owners will continue to opt-out of HUD
programs and demand ever high levels of Section 8 subsidies,
renewals from HUD with few repairs as the price for staying in
the program. Few owners will choose to go into mark-to-market.
The results will be continued loss of affordable housing and
missed opportunities for savings in the Section 8 program.
Based on the decisions of NAHT Mark-to-Market Task Force
and input from NAHT affiliates from across the Nation, we offer
the following recommendations to extend and improve the Mark-
to-Market Program this year.
Number one--Extend Mark-to-Market restructuring authority.
NAHT joins the emerging consensus that the authority to
restructure mortgages to save costs, as outlined in MAHRA,
should be extended indefinitely.
Number two--Continue OMHAR as a separate office, reporting
to the Secretary. After a slow start, OMHAR is now functioning
smoothly and produces results at a steady pace for HUD. To
throw sand in the machinery at this time would cause major
staff upheaval and confusion that would be both unnecessary and
unwise.
Congress should leave the successful Mark-to-Market Program
in the separate office where it is located now, reporting to
the Secretary of HUD for at least the next few years.
Number three--Redefine OMHAR's governmental mission and
transform PAE's into subcontractors for HUD. The experience
with PAE's over the past few years shows that turning over HUD
functions to State and private agencies is a bad idea. Because
of costing more from the tenants' point of view, contracting
out is undesirable because it adds to the complexity and
confusion for tenants who now have to deal with several
agencies rather than one. It is hard to educate the private
PAE's in particular about the value and the role of tenant
participation in decisions which affect our lives.
So NAHT recommends that Congress define the essential
Government functions of the Mark-to-Market Program--preparation
and approval of the final MRRAS Plan and review of public and
tenant comments and keep them inside of OMHAR.
OMHAR should be allowed to subcontract out specific
functions to PAE's or others, such as preparing a capital needs
assessment or appraisal in cases where OMHAR staff cannot do
them. But basic Government decisions regarding the MRRAS plan
should not be privatized.
Number four--NAHT offers several recommendations to improve
tenant participation.
A--Improve access to information. Tenants need help from
Congress to get assets to project operation budgets and other
documents to help HUD expose scams, identify savings, and
promote sales to nonprofits.
B--Extend the $10 million set-aside for technical
assistance funding. Section 514 of the MAHRA expires on
September 30. It is essential that Congress extend this program
to continue funding for the well-designed but under-funded
tenant assistance program which OMHAR has put in place.
C--Extend time for review of the MRRAS Plan. We recommend
that the required time for tenant review of the draft MRRAS
Plan be extended from the current 10 to 30 days.
D--Require written response to tenant comments. We
recommend that OMHAR and or the PAE reviewing tenant comments
respond in writing to these comments as it is required in
Federal
Environmental Reviews.
E--Require notice to tenants and a required meeting
throughout the mark-to-market process. Most important, tenant
notice and at least one mandatory meeting should be required of
all OMHAR Lites projects. Also, notice to tenants and a
guaranteed meeting should be required if a property is being
disqualified or kicked out of the program, or if an owner
changes its decision and changes to OMHAR Lites, mark-to-
market, or opts-out of the program for any changes in property
status. Tenants should also be notified if the PAE handling
their property changes in mid-stream.
F--Enforce Notice and Duty to Accept requirements when
owners opt-out and fix problems with Enhanced Vouchers. HUD has
stated publicly and in writing that it does not intend to
enforce an owner's duty to accept Enhanced Vouchers in the
event owners opt-out, even though Congress clearly required
this last year.
Nor has HUD always required owners to follow the 1 year
notice to tenants when they decide to opt-out.
Congress should clearly mandate HUD to enforce the law and
use this opportunity to fix remaining problems with Enhanced
Vouchers, which we describe in our statement.
Number five--Support the Preservation Matching Grant bill
to promote sales to nonprofit groups and preservation of mark-
to-market buildings. Today, OMHAR does not have access to
capital grant source to help nonprofit groups buy and preserve
buildings in the Mark-to-Market Program. For properties needing
repairs, a capital grant source would also be useful to help
owners fix up substandard buildings as part of the MRRAS Plan.
The Preservation Matching Grant bill which passed the House
2 years ago, has been refiled in the House as H.R. 425, and
will soon be refiled in the Senate by Senator Jeffords and
others. We urge the Subcommittee to hold an early hearing to
give this bill renewed momentum.
Number six--Adopt a Regulatory Program to Preserve
Affordable Housing. In extending the Mark-to-Market, NAHT
believes that the Congress should establish a national
regulatory program to limit owners' ability to opt-out, prepay,
and obtain windfall profits through high market rents at the
expense of residents in affordable housing. It would be far
preferable and less costly to preserve at-risk units by
regulating owner choice to opt-out of HUD programs.
Adoption of national regulations would send owners flocking
to the Mark-to-Market Program and results in major savings to
HUD. It would also mean more repairs for substandard buildings
and a big increase in owners willing to sell to nonprofit
groups.
Number seven--Reaffirm and strengthen HUD and OMHAR's
mandate to preserve mark-to-market buildings with project-based
Section 8 assistance. While the current program appears to have
resulted in only a few voucher conversions, it is premature to
conclude that the risk of mass voucherization of HUD housing
under mark-to-market has been avoided, as intended by Congress
when MAHRA was passed. Congress should use this opportunity to
clarify its intent to preserve the maximum amount of mark-to-
market eligible stock with project-based Section 8.
Mr. Chairman, thank you for the opportunity to provide
testimony to the Subcommittee today. NAHT stands ready to work
with the Subcommittee and OMHAR to make the Mark-to-Market
Program work better for tenants and the communities.
Thank you.
Senator Reed. Thank you very much, Ms. Thomas.
Let me begin the questioning by addressing the same
question to each of the panelists beginning with Mr. Wehrwein.
Putting aside for just one moment the placement of OMHAR in
HUD, either independent or part of the Housing Office, what is
the single most important change we could introduce into a
reauthorization bill?
Mr. Wehrwein. Senator, I think the most important change
that has already occurred has been the incentive guidelines
that have made it much more economically feasible to undertake
these transactions. They are currently not even in regulatory
form. And some more significant support of those guidelines by
the Subcommittee and the Senate would be much appreciated.
Senator Reed. Thank you, Mr. Wehrwein.
Ms. Thompson.
Ms. Thompson. Yes, Mr. Chairman. The most important thing
you could do in reauthorizing this program is to instruct HUD
or OMHAR, whichever winds up running it, to devolve greater
decisionmaking to the State and local governments, as Congress
first intended, and cut the paperwork.
Senator Reed. Thank you.
John, you have indicated the three issues. One, owner's
contribution to the rehabilitation fund; two, the inadequacy of
certain market rent in urban areas as a problem; and then,
finally, just increased flexibility. Would you want to
elaborate on any one of those, or add an additional comment?
Mr. Bentz. Yes, Senator. The rents that are in the inner-
city areas, and when they do a comparable market study, in a
lot of cases, do not really come up to what you really need to
support and sustain an inner-city development because of the
money it takes to run a development of this type and you are
doing a comparable market study that shows that the rents that
you are getting are excessive and the rents that you are
getting are not really excessive because of the items that you
have to address in each one of these facilities.
I think we have gone through a couple of mark-to-market
studies and we are going through a couple of restructurings.
The rents that have showed in the comparable market studies do
not really come to what we really need to run one of these
developments.
Senator Reed. Thank you.
Ms. Vann, what would you propose on behalf of your
organization or your perspective in terms of other than the
replacement of OMHAR?
Ms. Vann. I would like to make a comment based on the PAE
consensus, private PAE consensus on that canvassing that I did.
And I think from our perspective, we really feel that the
program is working. So, we would prefer not to see many more
changes. Now that we have it set in place and we are on a roll,
we would like to just continue.
Senator Reed. Thank you.
Ms. Vann. I am sorry. I cut off so quickly before, I did
not get to thank the Committee. I really do appreciate the
opportunity to present testimony today.
Senator Reed. Well, we thank you for coming and for your
excellent testimony.
Ms. Thomas, your perspective, please? What would you feel
would be essential to be included in new legislation?
Ms. Thomas. Yes, just to make sure that tenants are
notified up front and that they are part of the process from
the very beginning. I think that is crucial.
Senator Reed. How would you evaluate tenant participation
so far based upon your experience and the comments from your
colleagues?
Ms. Thomas. In some areas, it is good, and in others, it is
not so good. We know that in the beginning, everything was a
slow start. But there has been changes made. But we must
continue to strive to make it even better.
Senator Reed. Thank you.
Let me raise an issue here that was joined directly and
indirectly in the testimony. That is, there is a debate about
the public versus private PAE's. Many State housing finance
agencies have extensive experience--my housing agency in Rhode
Island, mortgage finance housing agency, is an excellent one.
Yet, for one reason or another, as has been indicated, State
PAE's have not done as much work as the private PAE's.
Several questions. Why are the private PAE's doing more? A
related question in my mind is, I presume that they are subject
to the same paperwork requirements, the same models, the same
everything.
I think Ms. Thompson wants to respond. And Ms. Vann, you
might want to respond, too.
Ms. Thompson. Certainly. I just want to put the numbers in
some perspective, if I could, first, Mr. Chairman because I
think there is some misconception that somehow the public
agencies have done many fewer restructurings than the private
agencies. That is not true as a percentage of the assets they
have been given. They simply have not been given as many assets
as the private sector. And I addressed that in my testimony
because the law required when they are an improved PAE, a
public PAE, that OMHAR mutually agree with them on the assets
that they will receive.
Instead, OMHAR, from the very beginning of this program,
has given assets to the private sector without even notifying
in many cases the public sector. And in some cases, it has
assigned an asset and within 2 weeks will call up the agency
and say: You know what? We are moving fast and we want to give
this to a private sector entity. We are just going to take it
away from you, for no reason related to capacity.
Let me give you the percentages because I think it is very
instructive. This comes off of OMHAR's own web site as of
yesterday. The public PAE's have completed 29 of the 226 full
restructurings they have been given. That is 13 percent. The
private PAE's have completed 101 of the 653 Fulls they have
been given, 15 percent, just 2 percent more.
Of the Lites, 220 of 258 Lites that the public have been
given, they have finished 85 percent of them. Of the 284 of the
355 Lites that the private sector received, they have completed
only 80 percent. So the public agencies are actually doing
better on the Lites, just 2 percent less on the Fulls
restructurings. They simply do not have the assets.
You have to remember, too, Mr. Chairman, that a number have
dropped out of the program. Some did not even sign their
original contracts because they felt that they just could add
no value to such a prescriptive program--Virginia,
Pennsylvania, Michigan, ironically, Governor Engler's agency
headed by Jim Logue, who was the Multifamily Assistant
Secretary at HUD, under Secretary Kemp, actually was a
consultant to the Subcommittee when you wrote this legislation.
His agency has withdrawn because they think the program is so
overly prescriptive, that they are simply agents. They are not
being called upon to use their expertise and they would rather
use it elsewhere.
Senator Reed. Thank you.
Ms. Vann, I want to give you a chance to respond if you
would like to.
Ms. Vann. I guess it is hard to speak to what has happened
between OMHAR and the public PAE's because I have been on the
outside looking in.
I know from a private PAE perspective, OMHAR possibly
making up for the slow start in the beginning and its lining up
the infrastructure. It seems like maybe--and this is just kind
of a perspective, that the private PAE's or private sector is
more driven toward speed and rolling assets and moving them
through. And I think that strikes to the heart of the
disagreement about the prescrip-
tiveness of the program.
Entities who have done a lot of affordable housing have
their way of doing it. And here comes MAHRA, which we believe
is a very specific law and you had to have a very specific
program to make sure that the statute was implemented correctly
and according to what Congress intended.
So it has been a benefit to us. And that is the only ying
and yang that I see between the two.
Senator Reed. Thank you, Ms. Vann.
Ms. Thompson, before I yield to Senator Allard, if you
could just respond.
Ms. Thompson. If I could just respond to that comment.
First of all, the numbers do not suggest that they are
doing more as a percentage, as I said before. But it is very
important that we focus on the point about driven toward speed.
This is not a program that should be driven by speed,
especially under pressure from OMHAR because they have so much
catching up to do.
This is a program where the States have to look at, should
look at, everyone should look at the preservation needs of
these properties. And what we are hearing from the States, and
I am not going to speak to the private experience because I am
not familiar with it, is that OMHAR is not allowing them to do
what is necessary to keep these properties in low-income use
for the long term. You are going to have this problem right
back before you in a few years if we do not look at that aspect
of the program.
Senator Reed. Thank you very much.
Let me turn to the Ranking Member, Senator Allard.
Senator Allard. Thank you, Mr. Chairman. And I hope that I
am not duplicating a question that you asked before. We juggle
several balls in the air at the same time and sometimes it
requires us just to step out of the room for a moment or two.
Regarding those properties that we were mentioning in the
last panel, what we call the Watchlist properties, these are
properties with physical and financial troubles that are being
monitored by the Office of Housing, what do you think should
happen with these properties and what should be the role of
HUD's Office of Housing?
I thought I would call on you, Mr. Wehrwein, and Ms.
Thompson and Mr. Bentz to respond to that question.
Mr. Wehrwein. Thank you, Senator.
I share some of the concerns voiced in the previous panel
about the adequacy of the Watchlist process. In my estimation,
it doesn't portend well for the future of those assets. And I
would argue that the HUD Office of Housing Resources is
probably insufficient to oversee and manage all of those
properties and to assure that, in fact, they are being
monitored closely. I just do not think they have the resources.
I would suggest that if the Subcommittee were interested in
considering any changes to the legislation in terms of
reauthorizing and amending, that one consideration might be
that there be consideration given to pushing more of those
assets into a required restructuring because, as Ms. Thompson
said earlier, I think that in a different category of assets,
we are going to see these same assets come before us with some
problems in 4 or 5 years.
Senator Allard. Ms. Thompson.
Ms. Thompson. I would simply add, I agree with Mr.
Wehrwein. I would simply add that it is too bad at this point
in a relatively new program in terms of how long it has been
really fully operating, that we even have a Watchlist. This is
the very thing that we were trying to get away from. All of
these properties were on a Watchlist technically to begin with,
but we are beyond that at this point. But I agree. I think that
restructuring should be done to those properties because their
long-term health, both physically and financially,
managerially, is not assured.
Senator Allard. Mr. Bentz.
Mr. Bentz. Yes, Senator. Thank you. The Watchlist, I think,
is a misnomer because the original intent, as two people
previously testified, was to get the properties out of HUD, and
if you are on a Watchlist, you go back to HUD, to the HUD
office, which is something I believe that they were trying to
eliminate to begin with.
The restructuring process is somewhat cumbersome and the
Watchlist is something that I think they should reevaluate. It
is a definite problem.
Senator Allard. I would like to address this to, Mr. Bentz,
and Ms. Vann, and Ms. Thomas. Last September, HUD released a
package of initiatives for property owners participating in the
Mark-to-Market Program. How helpful have these initiatives been
in bringing reluctant owners to the table from your
perspective?
We will start with you, Mr. Bentz.
Mr. Bentz. I think they have been extremely helpful. We
have done a number of deals over the last 2 or 3 years and we
have benefited from some of the changes. I think Senator Reed
asked me a question a little while ago which it kind of went
right over my head with regard to the owner's participation in
the 20 percent that is supposed to come up with the
restructuring of a particular development.
That has been one of the drawbacks in the entire program, I
think, is the 20 percent that the investors basically have to
come up with. And in a lot of cases, they just do not want to
come up with the dollars, so they either opt-out or they go
through another form of restructuring which is not beneficial
to the development.
Senator Reed. Ms. Vann.
Ms. Vann. I think it has had a significant impact, made a
big difference in our portfolio.
Senator Reed. Ms. Thomas.
Ms. Thomas. I think that, actually, it was a problem in
areas because you had owners opting-out and definitely tenants
not being aware of anything. So it was not that great for us.
Senator Allard. Do you think that offering such incentives
could have an unintended effect with some owners and make them
hold back from participating in the program and hope that
better incentives might come along later?
Ms. Thomas. Yes.
Senator Allard. I would like to have you three answer that.
Mr. Bentz. Yes. I would say, yes. One of the other
drawbacks, especially in the complete restructuring program, is
the 30 year obligation. If you are going to go through a
restructuring from an owner's standpoint, depending on the area
you are in, 30 years is a long time.
Senator Allard. A long time.
Mr. Bentz. I do not think I am going to be here for another
30 years. Maybe my kids will, but I do not think I will be. The
30 years is one of the biggest drawbacks I think in a lot of
the
programs, to get owners and investors to stay in the program.
Senator Allard. You are suggesting that maybe we look at
these not so much from a housing aspect, but just almost from a
commercial property aspect, where you think in shorter terms,
generally.
Mr. Bentz. Yes.
Senator Allard. Ms. Vann.
Ms. Vann. We have not sensed that any of the owners are
still holding out for a better deal. We are starting to sense
that the owners are saying things like, we just want to get
this done. We just want to get through it.
And one of the real positive aspects of the program that I
have seen is that owners are very pleased with the amount of
rehab and rejuvenation of these properties. It is solving a lot
of their problems in that area, also. I do not see any changes
in the future that could make much of a difference in what we
are doing.
Senator Allard. Ms. Thomas, do you want to add anything?
Ms. Thomas. Just basically that I am not sure what the
owners are holding out for, whether they are holding out for
more money or not. I do know that we did have problems and
still have problems, and that tenants are suffering for it.
Senator Allard. Okay. Now the last question, if it is okay,
Mr. Chairman.
Senator Reed. Please.
Senator Allard. Do you think there is anything more program
administrators could do to remove barriers to owner
participation?
We will start with you again, Mr. Bentz.
Mr. Bentz. I do not think so. I think, overall, the program
that is in place has been, as I said before, somewhat
reasonable. I think it is probably the best that we are going
to get at this particular time without specific legislation to
address some of the other areas which I mentioned previously.
Senator Allard. Okay. Ms. Vann.
Ms. Vann. I think the cost of small loans, it is cost-
prohibitive. If there was a way that you could see fit to maybe
aggregate and pool loans when they are, say, under $150,000,
under $200,000, because what we find, to get lenders to do
those smaller loans, the fees are just incredible. And rightly
so because the lenders have to do FHA servicing. To justify the
effort, they have to charge a lot of fees.
We are left in a limbo area there on the small loans where
there are very little options available to the owners. They can
come up with cash, but then, that kind of presents a problem
for them. So if there could be a way to provide a vehicle for
under $200,000, a ready vehicle, then that would be a great
improvement.
Senator Allard. Ms. Thomas.
Ms. Thomas. I just think more money should be available so
that the folks can go through the process. And hopefully,
owners will get on board.
Senator Allard. Mr. Chairman, thank you.
Senator Reed. Thank you very much, Senator Allard.
Just a final opportunity. You listened to the previous
panel. If you have comments with respect to what they said, Mr.
Wehrwein, a reaction or comment, on any point that you think
should be addressed based on the previous panel.
Mr. Wehrwein. Thank you, Mr. Chairman. It sounds to me like
there is an awful lot of agreement around the extension of the
authorities and the only disagreement is where it lands.
I would just assert that we would attempt to do what would
throw the least, I think someone said, sand in the machinery,
and try to keep this thing moving along and attempt to react to
some of the problems that Ms. Thompson and others have talked
about and attempt to fix a machine that is already working.
Senator Reed. Ms. Thompson.
Ms. Thompson. Yes, I would like to address something that
Mr. Peppercorn said in his statement.
He talked about the consolidation of the public agencies
under this program. There has been no consolidation. The
program provides for no consolidation. What there has been is
elimination. They have driven public agencies out of this
program. Forty-two agencies, Mr. Chairman, Senator Allard, 42
State housing agencies, including both of yours, applied and
went through a rigorous review at HUD and were approved to
participate.
Every agency that applied was approved, many more than
anyone ever thought would step up to the plate. Now, today, we
have 22 participating. And not yours in Rhode Island. And your
Colorado agency, Senator Allard, is really struggling. In fact,
I spoke with them about a deal the other day and I finally
said, look, I do not know what to tell you, except call John
Carson because he will help you, and I am very serious. And you
will be hearing from them, John, if you haven't. The agencies
are very frustrated. They do not have other priorities, as Mr.
Peppercorn said. If they did, why would 42 of them have
applied? Why would 42 of them have staffed up and gotten ready
to run this program if they had other priorities?
He also mentioned that the State HFA's, that this is very
difficult real estate work. It is not just allocating credits
or allocating bonds, as though the State HFA's simply handed
those out of a drive-through window.
They do rigorous analysis under those programs. They are
required to by law. The housing credit is probably the most
successful Federal housing program ever, as we saw with the GAO
report a few years ago and the fact that you folks increased it
in the Congress by 50 percent, 40 percent in the case of bonds,
you thought they were working so well.
Why were they working so well? Because the State and local
governments make the decisions based on the unique conditions
in their States and communities, not Washington.
So to say that the very agencies that can run those
programs and run them well and use the same disciplines that
they would use under the OMHAR program, are somehow not capable
of running this program.
And to somehow say that it is not OMHAR that is complex, it
is the program that is complex. OMHAR has created the program.
Those 68 forms that are required for each deal are not required
by the statute you wrote, not in any way, shape or form.
If you think back to the demonstration that you first
authorized as a pilot for this program, it worked very well.
But they loaded all kinds of requirements on top of that,
requirements that are not necessary. They are not driven by the
statute. And we urge you to review that as you look toward the
reauthorization.
Thank you.
Senator Reed. Thank you.
Mr. Bentz.
Mr. Bentz. Thank you, Senator. It appears, I think, with
past testimony between Mr. Weicher and Mr. Peppercorn, that
there is a little bit of friction between the two agencies.
I think it is to the benefit of all of us, and especially
for those two gentlemen and their two agencies, to get together
to form some kind of an alliance that is going to allow the
program to continue.
And if it has to do with the PAE's and get them more
involved, I think that that is something that has to happen.
Overall, I think the program has run fairly well over the
last 6 months to a year. Everybody has stated that it has taken
3 years to get underway and I think that is--I do not know
whether it is justifiable or not justifiable. But it was a very
cumbersome task that they had to undertake and I think with the
new administration coming in, I think they are going to have to
work together to make the program work.
Senator Reed. Thank you.
Ms. Vann.
Ms. Vann. I think the comments that I heard today about
moving OMHAR into HUD to achieve better efficiencies and
consistency of the program is a plus, as long as the personnel
can be maintained, so we do not have new learning curves, loss
of momentum, et cetera.
Senator Reed. Thank you.
Unless Senator Allard has additional questions, you have
the last word, Ms. Thomas.
Ms. Thomas. Thank you. I would just like to see OMHAR stay
where it is, and to operate in the way it has been. It is
working now. Let's just push forward.
I want to thank the Committee once again for the
opportunity to speak before you.
Senator Reed. Thank you.
Thank you all for your testimony. There may be written
questions and we would request that you respond promptly.
Thank you very much. We are adjourned.
[Whereupon, at 12:04 p.m., the hearing was adjourned.]
[Prepared statements, response to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF SENATOR JACK REED
Today's hearing is about affordable housing and how to keep it
affordable. In particular, we will explore the success of the
``MultiFamily Assisted Housing Reform and Affordability Act''--the so-
called Mark-to-Market legislation. This law is scheduled to expire on
September 30 and we will be attempting to determine how well it has
worked and whether it needs to be reauthorized.
Congress passed the Mark-to-Market legislation in 1997 in order to
update and restructure Section 8 project-based developments insured by
Federal Housing Authority. About 8,500 such projects with over 800,000
units of affordable housing were built in the late 1970's and the early
1980's.
The Federal Government guaranteed that these projects would be
built by insuring the mortgages and using Section 8 contracts to
guarantee that the rents would be high enough to pay off the mortgages.
In most markets, these rents were above market levels. Typically the
mortgages for these multifamily dwellings had terms of 40 years and the
Section 8 contracts had terms of 20 years.
By the late 1990's, the 20 year Section 8 contracts started to
expire and Congress had begun to renew all Section 8 contracts at
market rents for a period of only
1 year. In markets in which the fair market rent was higher than the
contract rent, a simple renewal of the contract was sufficient to
continue supporting the property.
However, in many cases, contract rents remained far above local
rents. In these cases, Congress' decision to renew Section 8 contracts
at lower market rents was likely to result in rents too low to support
the remaining mortgage payments on such properties. As a result, it
looked likely that these FHA-insured properties would default, costing
Federal taxpayers tens of billions of dollars.
The Mark-to-Market legislation was passed in an attempt to address
this problem. It had two objectives: first and foremost, the
legislation was meant to preserve
affordable housing by putting it on a stronger footing, both
financially and physic-
ally. Second, the law was designed to reduce the cost to the Federal
Government
of rental assistance payments.
The Office of MultiFamily Housing Assistance Restructuring (OMHAR)
was created to accomplish both of these objectives, with the help of
Participating Administrative Entities (PAE's).
Our panel of witnesses, both Government witnesses and stakeholders
involved in the restructuring process, will tell us what progress has
been made in restructuring the rents and debts of the FHA-insured
Section 8 portfolio; the savings such restructurings have generated for
the Federal Government; the physical condition of the housing stock
that is being preserved; and the effectiveness of the Office of
MultiFamily Housing Restructuring Assistance or OMHAR.
We look forward to their testimony.
----------
PREPARED STATEMENT OF SENATOR JON S. CORZINE
Thank you, Mr. Chairman, for holding this hearing and I also want
to thank all of the witnesses for appearing here today to help discuss
the status of the Mark-to-Market Program and to help us determine what
we need to do to continue to
preserve the FHA insurance fund while also maintaining safe, quality
housing for
low-to-moderate income Americans across this country.
Although I am new to the Committee, I believe the issue of
affordable housing is of the utmost importance to our Nation. This is
especially true in the current economic climate when so many working
families are struggling to find access to decent, safe, affordable
housing and when economic indicators suggest that we may be facing a
downturn. I am looking forward to learning more about the Mark-to-
Market Program and to having a productive discussion as to how we may
best move this program forward.
Again, Mr. Chairman, I thank you for holding this hearing and I
look forward to hearing from our witnesses today.
----------
PREPARED STATEMENT OF SENATOR PAUL S. SARBANES
Mr. Chairman, I want to congratulate you on the occasion of your
taking the gavel of the Housing and Transportation Subcommittee. Given
your ongoing active interest in these issues, I look forward to your
leadership of the Subcommittee.
While the Subcommittee has not yet been officially reorganized,
Senator Gramm graciously encouraged us to proceed with this and other
hearings as we try to get the work of the Committee done.
Today's hearing is an important review of the status of bipartisan
legislation passed in 1997 to deal with the problem of expiring Section
8 contracts on FHA insured buildings. The purpose of that legislation
was to reduce Section 8 rents that were above market, restructure the
mortgages where necessary, and provide for needed renovation. The
result we were aiming for, and seem to be achieving to date, was the
upgrading and preservation of valuable affordable housing at rates the
Federal Government could afford.
The legislation establishing this ``Mark-to-Market'' Program, as
well as the Office of MultiFamily Housing Assistance Restructuring
(OMHAR), which was created to implement the program, expires at the end
of this fiscal year. Yet, the need for the program will continue for a
number of years to come.
It is our responsibility to decide how we want to proceed with
regards to the legislation. It is my intention to work with my
colleagues in the Congress and in the Administration to come to a fair
determination on how to keep this effort on track.
Again, I want to thank Senator Reed for holding this hearing. He
has put together two very good panels of witnesses that provide an
opportunity for all the stakeholders to participate. I feel very
strongly that the Committee should proceed in a methodical, workmanlike
manner in an effort to hear from all interested parties. In the end,
this kind of thorough review and comprehensive airing of the issues
should result in better legislation. This hearing is consistent with
this approach.
Mr. Chairman, I look forward to reading the testimony.
----------
PREPARED STATEMENT OF SENATOR CHRISTOPHER J. DODD
The Mark-to-Market Program got off to a slow start after Congress
passed the ``MultiFamily Assisted Housing Reform and Affordability
Act'' in 1997. But in the couple of years that the program has been
operating, it has helped put hundreds of housing projects on a more
sound financial footing.
It is my understanding that the program has already saved taxpayers
$450 million by helping housing projects restructure their debts and
reduce their costs so that the Government could in turn reduce the cost
of Section 8 vouchers without causing hardship to low-income tenants.
Nearly 600 projects have already undergone some type of restructuring
under the Mark-to-Market Program and the program appears to be
achieving its goals.
When the program started there were about 8,500 projects that were
eligible for restructuring. Those projects had more than 800,000
housing units--that is 800,000 places that people call home. And the
Mark-to-Market Program can help focus resources where they should be
focused on maintaining those units, rather than simply servicing debt.
The program has worked well for some, but it could be working well for
many others.
In my opinion, OMHAR and the Mark-to-Market Program have gotten off
to a good start and it is my hope that the witnesses will provide some
insights to explain how we can ensure that the full benefits of the
program can be realized.
----------
PREPARED STATEMENT OF JOHN C. WEICHER
Assistant Secretary for Housing-FHA Commissioner
U.S. Department of Housing and Urban Development
June 19, 2001
Chairman Reed, Ranking Member Allard, distinguished Members of the
Subcommittee, thank you for inviting me to testify on the impending
expiration of the Office of MultiFamily Housing Assistance
Restructuring. As you know, the restructuring authority and the
authorization for OMHAR expires on September 30, as part of ``The
MultiFamily Assisted Housing Reform and Affordability Act.'' I am here
this morning to discuss the Administration's position concerning the
future of OMHAR and its legislative authorities.
Before I begin, let me express my appreciation to this Committee
for its support of my confirmation as Assistant Secretary for Housing-
FHA Commissioner. It is an honor to appear before you today.
I am reminded that the first question from Senator Sarbanes at my
confirmation hearing concerned the ``Mark-to-Market'' Program. Chairman
Reed also raised the issue of mark-to-market during the hearing. So it
is fitting that my first hearing before this Subcommittee should be on
the same subject.
Mr. Chairman, the challenges of HUD's multifamily assisted
inventory involve some of the most complex issues that the Department
has had to address. I first became involved in this subject 15 years
ago as a member of the Hills-Reuss task force. Congress passed
legislation in 1987 and again in 1990, but the problems remained
unresolved. During the mid-1990's, Congress wrestled for 3 years with
the mark-to-market concept before finally passing ``The MultiFamily
Assisted Housing Reform and Affordability Act'' in 1997. The process
for dealing with these properties has taken longer than originally
anticipated, for a variety of reasons, so we now need to revisit this
issue yet again.
Since assuming the position of Commissioner, I have discussed with
Secretary Martinez the future of these authorities and the implications
for public policy, particularly with regard to the residents of these
properties. Discussions within the Administration are still ongoing,
and will necessarily involve the Office of Management and Budget, among
others, before a final recommendation is made. However, HUD's fiscal
year 2002 budget proposal submitted to Congress in April acknowledged
the Administration's intention to seek an extension of the debt
restructuring authority. In his testimony before the Senate
Appropriations Subcommittee last week, Secretary Martinez stated that
there continues to be a need for this program, and that HUD would be
seeking an extension of the restructuring tools.
There appears to be general support for an extension of the
restructuring authority beyond the current scheduled expiration date.
The Administration will be submitting legislative recommendations on
how best to proceed with that extension.
OMHAR estimates that over 2,500 Section 8 properties have contracts
that expire after this fiscal year; approximately 1,300 are estimated
by OMHAR to be above market. There is a continuing statutory
requirement to mark down rents to market levels. Without the mortgage
restructuring tools, it seems likely that many of these properties
would default on the mortgages. This would expose FHA to significant
claims and place the housing of thousands of families in jeopardy.
The future of the OMHAR office itself has generated a greater level
of discussion than the extension of the restructuring authorities. The
first few years of OMHAR were less productive than had been hoped for a
variety of reasons. In large
part, the first 2 years were spent establishing program infrastructure
and assigning
the properties to the Participating Administrative Entities (PAE's) for
restructuring
actions.
OMHAR did not complete any restructurings until the fourth quarter
of 1999, some 2 years after it was created. These first completions
were rent restructurings, without any changes in the mortgage amount.
The first full mortgage restructuring did not occur until the second
quarter of 2000.
Since then, however, there has been significant progress. OMHAR
completed 423 rent restructurings by the end of 2000 and has completed
another 63 through May of this year. More importantly, the pace of full
mortgage restructurings has picked up sharply this year. There were 30
full mortgage restructurings in 2000, and another 77 so far in 2001.
Further, I understand that an additional 75 full restructur-
ings are scheduled for closing in the next 60 days. Since full mortgage
restruc-
turings are more complicated, this is encouraging. But clearly more
needs to be done, and we want to ensure that this important work is
allowed to continue.
In his Appropriations Subcommittee testimony last week, Secretary
Martinez also discussed the future organizational structure of OMHAR.
He stated that the Department expects to request a 3 year extension for
OMHAR with two changes: (1) that the office would no longer be headed
by a Presidential appointee, (2) and that OMHAR would fall under the
authority of the Office of Housing.
Accordingly, we may recommend to Congress the continuation of a
separate OMHAR office dedicated to this work, but under the authority
of the FHA Commissioner, rather than maintaining its current position
as an independent office. This move would simplify issues of
jurisdiction and coordination. At present, the Office of Housing is
responsible for subsidy payments and the management of insurance
contracts, while at the same time OMHAR is responsible for
restructuring them
for the future. The same projects are under the jurisdiction of two
separate, equal
offices, each reporting to the Secretary simultaneously. With OMHAR
under the
authority of the Commissioner, this anomalous situation would no longer
exist. In
addition, this proposed structure would facilitate coordination between
OMHAR
and the 18 Multifamily Hubs, which are located throughout the country
and have
detailed information and knowledge on any particular property in the
field. We
believe the completion of OMHAR's work would be expedited by a simpler
administrative structure.
At the same time, we certainly recognize the critical nature of the
work under OMHAR, and would have every expectation that the office
would be fully dedicated to that work and only that work. Having come
halfway through the mark-to-market process, we intend to see it through
to completion.
In addition, since OMHAR would be an entity reporting to the
Commissioner, we do not expect to recommend reauthorization of the
position of OMHAR Director as one requiring appointment by the
President and confirmation by the Senate. This would avoid a
circumstance where one Presidential appointee reports to another
Presidential appointee of equivalent rank.
We understand that the bulk--almost two-thirds--of the 1,300
anticipated properties subject to debt restructuring have contracts
that expire in the next 2 fiscal years. With an average processing time
of approximately 13 months following contract expiration, we believe an
extension of 3 years beyond fiscal year 2001 is appropriate. By 2004,
we should all be able to judge whether any further extension is needed,
or whether the small remaining workload can be handled within FHA.
Mr. Chairman, OMHAR and the authority it exercises were enacted to
strike a balance between the preservation of affordable rental housing
and the rising costs of renewing expiring Section 8 contracts. If
Congress had not intervened, project-based Section 8 renewal needs
would have reached $7 billion annually by 2007. Recently, encouraging
progress had been made in preserving the viability of many of these
properties. But much work remains to be done. For Secretary Martinez,
and for me, the continuation of this work is one of our highest
priorities. We look forward to working with Congress and this Committee
in the coming weeks on this important issue.
Thank you.
----------
PREPARED STATEMENT OF IRA G. PEPPERCORN
Director, Office of MultiFamily Housing Assistance Restructuring
U.S. Department of Housing and Urban Development
June 19, 2001
Mr. Chairman, Ranking Member Allard, and distinguished Members of
the Subcommittee, thank you for the opportunity for me to be here today
in order to give you a status report on the Mark-to-Market Program. I
would like to give you a brief but comprehensive look at what has been
accomplished by OMHAR through the Mark-to-Market Program, what remains
to be done, and what will be needed in order to allow the Mark-to-
Market Program to continue achieving the goals that Congress envisioned
in the MAHRA legislation.
At this time I would like to thank Secretary Martinez' Office and
John Weicher, Assistant Secretary for Housing--FHA Commissioner, for
their leadership and for asking the honest questions about the Mark-to-
Market Program's continuation.
If continued, I believe their thoughtful analysis will only serve to
strengthen the
program.
I would also like to recognize the leadership of a man serving on
this Committee, Senator Evan Bayh, under whom I had the honor of
serving for 8 years.
Let Me Start With A Brief Background On OMHAR
Congress created the Office of MultiFamily Housing Assistance
Restructuring (OMHAR) as a semi-independent entity within HUD to
address a financial crisis in the Section 8 program for affordable
housing assistance. Former Senator Connie Mack noted at the time that
an effort to ``reform the Nation's assisted and insured multifamily
housing portfolio'' was needed in order to handle what was termed the
most difficult problem in housing at the time. OMHAR has accomplished
much and worked hard to meet the challenge of its mission. Unless
changes are made to the sunset provision in the MAHRA legislation,
OMHAR and its restructuring authority will go out of existence on
September 30, 2001. However, the statutory requirement and the need to
reduce the rents on expiring above-market, Section 8 contracts will
continue. The many goals of the Mark-to-Market Program can be grouped
into three categories:
Social
Preserving affordable housing by maintaining the long-term
physical and financial integrity of the privately-owned, publicly-
subsidized rental housing insured or held by FHA.
Financial/Economic
Reducing long-term project-based Section 8 rental assistance
costs.
Reducing the risks of large FHA insurance costs.
Management/Administrative
Promoting operating and cost efficiencies in Section 8
assisted properties.
Addressing problem properties by terminating relationships
with owners who have not met their obligations and responsibilities
to HUD and/or to their tenants.
Establishing a nationwide network of local public and private
entities to administer the Mark-to-Market Program.
Engaging and organizing tenant and local community
participation in the restructuring process to preserve affordable
housing.
Providing a consistent, prudent, and documented process for
all participating properties.
The Mark-to-Market Program offers a ``win-win'' opportunity for the
Government, taxpayers, tenants, and communities, as more deals are
closed, we are saving more money by reducing excess payments on Section
8 subsidy contracts, while ensuring that the properties involved are on
a sound financial footing, and preserving needed units of affordable
housing in good condition, thereby meeting the goals of the Mark-to-
Market Program.
Almost 900 properties--comprising over 63,000 units--have gone
through the mark-to-market process, resulting in net savings of $895
million. A big job remains--about half of the proerties assigned to
OMHAR still remain to be completed.
In addition to the large number of contracts expiring through
the remainder of this fiscal year, there are 3,715 more Section
8 contracts expiring in the next 3 fiscal years, almost half of
which could be above market.
The Mark-to-Market Program is operating efficiently. Part of
our management approach has been to integrate constructive
feedback from all stakeholders--this has enabled us to
incorporate significant improvements in the process. We are
operating with an experienced and highly motivated staff and
experienced public and private sector contractors (our
Participating Administrative Entities or PAE's), we are running
with momentum.
Let Me Give You A Better Idea of the Scope of the Program
The Mark-to-Market Program is currently facilitating the
preservation of over 140,000 units of affordable housing in 1,739
properties. The underwriting requirements of the Mark-to-Market Program
ensure that these affordable housing properties will be operated in a
manner to ensure their ongoing economic viability and good physical
condition. At a time when affordable housing is in short supply in many
parts of the Nation, the Mark-to-Market Program provides critically
needed continuity to many communities and residents.
A PAE's partner highlighted in his letter of support to the
Subcommittee that ``discussions regarding OMHAR and the mortgage
restructuring process frequently forget the manner in which it impacts
the resident--the quality of housing provided to the residents under
mark-to-market (M2M) has dramatically improved.''
In addition, one of the Nation's largest apartment owners, Denver
based Apartment Investment and Management Company (AIMCO), who has 110
projects in the program, considers the Mark-to-Market Program
``important to AIMCO and
residents in [its] affordable housing portfolio. The program will
enable [them] to
continue to provide safe and decent affordable housing to qualifying
tenants for
many years to come while protecting HUD from claims under its mortgage
insurance programs. The program is an important element in addressing
the affordable housing requirements in the country.'' Their statement
has been submitted to the Subcommittee.
Completed transactions so far have resulted in net savings of $895
million. Once all deals in the current pipeline are completed, we
estimate that the savings represent $2.4 billion, while at the same
time ensuring that these 140,000 units of
affordable housing remain part of the affordable housing stock. This is
not the final tally of mark-to-market savings, since additional
properties expected to enter the Mark-to-Market Program between now and
the sunset date will generate additional savings. In addition, there
are future savings to be captured from the Section 8 contracts expiring
over the next 3 to 5 years.
In furtherance of our goals, we have adopted processes that:
Require the application of national standards for consistency,
while enabling solutions tailored to local conditions and community
requirements.
Utilize a small staff of Government employees to leverage both
public and private
contractors.
Rely on market-oriented principles to set rents.
Encourage meaningful participation by tenants in the affected
housing units.
Maintain communications and share information and concerns
with all stakeholders, including owners, lenders, HUD offices,
tenants, and Government agents, on an ongoing basis.
OMHAR Tackles Many Challenges In Pursuit of Its Mission
As I mentioned earlier, the result of the process is savings to the
Government, and to the taxpayer, that are generated even as the
affordable housing remains available, and as the physical condition of
the housing is improved, when needed.
First of all, the fundamental complexity of the Mark-to-Market
Program is due to the nature of the work that must be accomplished in
order to restructure a property. These real estate workouts occur in
the context of a complex legislative and regulatory environment, and
involve negotiations between property owners, PAE's, tenants, lenders,
and other community stakeholders.
Some properties, despite having these above market rents, are
physically, financially, or managerially stressed even before the rents
are reduced. The legislative requirements of the Mark-to-Market Program
are explicit regarding transaction costs and cash flow to owners after
restructuring and these terms have created difficult hurdles to a
successful restructuring for some owners.
In some cases, property conditions or ownership problems have been
such that
we have not been able to close restructuring transactions or continue
project-based
assistance; tenant protections and providing vouchers has been a key
goal in
such cases.
In a letter of support submitted to this Subcommittee, a public PAE
partner of ours captured perfectly the challenge we balance every day:
``while these [social,
financial, and administrative] are admirable goals, they continuously
compete with one another and speak volumes about the complexity of the
process.''
How Has OMHAR Responded To These Challenges?
We have listened to our stakeholders, we have implemented changes
where prudent, and we have striven to create as flexible a program as
possible within the context of the legislation. As a result, beginning
in the fall of last year, we implemented revisions and initiatives to
address the concerns of our stakeholders.
First, we introduced additional performance-based incentives for
participating owners. Each year after mark-to-market, if a property
meets program standards for financial, physical and managerial
soundness, the property owners will receive a market level of return on
the capital they were required to invest in order to pursue mark-to-
market, plus a greater share of property cash flow for that year. We
believe this reform is vital for the long-term health of the properties
and aligns the interests of HUD and the owner community. We also
believe it appropriately rewards owners for achieving HUD's public
policy objectives. Purchasers are also eligible for these same
performance-based incentives.
Second, we introduced incentives for purchasers, recognizing the
additional costs they will incur, over and above costs typically
incurred by stay-in owners. This feature was necessary in order to
ensure that, whenever an owner chooses to sell a mark-to-market
property, there will be a capable and desirable purchaser willing to
take over the property and take it through mark-to-market.
We have made use of our statutory authority under MAHRA Sec. 517a5,
to forgive second mortgage debt, when appropriate. PAE's may consider
second mortgage debt forgiveness for independent, tenant endorsed,
community-based nonprofit and public agency purchasers who accept a
longer use agreement, agree not to sell the property for a 10 year
period, and agree to reinvest a portion of cash flow in the property.
This reform is consistent with our statutory responsibility to
facilitate transfers when owners desire to sell.
Finally, we introduced reforms to improve the level of
communication between OMHAR, PAE's, owners, and purchasers.
Specifically, we gave the owners and purchasers the right to receive
various important information throughout the re-
structuring process, and we formalized the notification and appeal
processes to give
owners and purchasers additional assurances that their point of view
would be solicited, heard, and considered.
We have reached an agreement with Ginnie Mae to facilitate the
securitization of small mortgage loans created for mark-to-market
properties, thereby increasing the availability and decreasing the cost
of these small mortgage loans.
We have created a ``large owner initiative'' under which owners of
large portfolios were given the opportunity to centralize processing of
all of their properties with one or two PAE's. This initiative is now
directly responsible for a significant share of new transactions coming
in to OMHAR.
We have responded to concerns and comments received from our PAE
partners and greatly streamlined standard program guidance, giving
PAE's additional flexibility, and placing a premium on their
professional judgment of what is best for each property.
All of these initiatives demonstrate our commitment to a workable
program that circumvents hurdles and responds to valid stakeholder
issues--all the while continuing to achieve the mission and ensuring
public accountability.
We have all come a long way, especially in this past year. But
there is still a high level of ongoing activity in the Mark-to-Market
Program, and much work remains to be done.
Closed 126 full restructurings through May 2001--10 more have
already closed this month to date.
Another 27 closings are scheduled for this month.
47 more closings are being scheduled at this time.
116 transactions are approved and are now in owner
negotiations.
169 deals are currently in approval stages.
331 properties are in due diligence and underwriting.
Expect approximately 300 new assets will enter the program by
sunset.
Roughly another 1,700 of the 3,500 properties with expiring
Section 8 contracts through fiscal year 2004 are expected to be
above market.
As you can see, there is more work to do, which will bring more
savings and will preserve more affordable housing. We have the
infrastructure in place, with a
momentum that can be sustained in order to complete the task that
Congress
envisioned.
OMHAR and its partners are positioned to complete that work. The
program is in place. Yes, it took time for the Mark-to-Market Program
to build its infrastructure, to work with its partners to ramp up
production to our satisfaction, and to the satisfaction of others. But
we are now there. The processes work, and we are meeting the goals of
the program. Let me detail the resources in place to complete our
mission.
Staffing
We currently have 87 staff on board, of which 38 are permanent and
49 are temporary. Chart 6: Two-thirds of our staff is comprised of
production staff--meaning overseeing PAE's, reviewing and underwriting
deals, and conducting closing and post closing activities: Chart 7:
Specifically, three quarters of our field staff that are completing
restructurings are term employees--which means that their jobs with
OMHAR expire in 102 days.
The staff has exceptional and very diverse backgrounds. As
envisioned under the legislation's creation, many have RTC, FDIC
workout, and DUS underwriting experience. These staff are trained and
experienced and have established effective oversight and direction for
the Mark-to-Market Program. I, personally, continue to be impressed by
the professionalism of the OMHAR staff and their commitment to boosting
production numbers and meeting the goals of the program in the face of
the looming September 30 sunset date.
Chart 8: Our partners, the PAE's, are the 3rd parties through which
the nitty gritty work of restructuring gets done. At our peak, we had
contractual relationships with 51 PAE's (42 publics and 9 privates);
and we are now working with 34 PAE's (25 publics and 9 privates). Why
did this consolidation happen? There are many reasons we can identify:
A lack of deal inflow meant that volumes were insufficient for
either the PAE's or OMHAR to justify continued participation.
The restructuring process was much more rigorous and time-
consuming than
anticipated.
The mark-to-market restructuring is a ``real estate workout''
and the ability to
negotiate in controversial situations wasn't an expertise that some
PAE's had or wanted to develop.
The various roles of being the Section 8 contract
administrator, lending to the local affordable community,
developing more housing with some of the owners, and doing mark-to-
market restructuring, presented conflicts of interest in some
cases.
With approximately 900 deals under our belt, we have developed a
stable capacity amongst our PAE's. And let me assure you, we have
stellar performers--both public and private.
Given the magnitude of the training, management and oversight
efforts required by OMHAR, I think it is important to share with you
that the capacity between the public and private PAE's is quite
different. The average private PAE manages 66 deals, while the average
public PAE manages 7 deals. While OMHAR continues to be committed to
the statutory preference for public PAE's, and we are very pleased with
the quality of many of the public PAE's performance, when a PAE with
very few deals does not perform in a timely manner or does not deliver
quality work products, it is very labor intensive with little product
to show for the effort. When numerous PAE's with few deals do not
perform in a timely manner or do not deliver quality work products, it
ties up limited staff resources and impedes production. All nonrenewals
to date have occurred in public PAE's, who had capacity, competing
priority, and/or performance issues.
It is important to emphasize that public entities continue to play
a vital role in the mark-to-market process, even though in certain
cases it has not proved appropriate or efficient for them to serve as
PAE's. Finance agencies, in their traditional roles as affordable
housing lender, tax credit allocator, or allocator of State affordable
housing grants and low-interest loan funds, are well positioned to
provide new funds to restructured properties. Congress intended this in
designating HFA's as part of the restructuring process--to date,
however, the public PAE's have brought additional funding to less than
a dozen deals. Finance agencies can make the difference between
preserving housing for the long term or losing it from the affordable
housing stock, by facilitating the use of additional sources of funds
that can be instrumental to a successful restructuring. Because States
have not typically brought outside sources to OMHAR deals, OMHAR issued
clarifications that it does not seek to recoup external funds brought
into mark-to-market properties and wants them invested entirely into
properties in their States.
In addition, due to their historical working relationships, public
entities often have a wealth of information about the properties and
owners in their jurisdictions, and about the appropriate level of rents
and operating expenses. With this background, with their sensitivity to
the challenges facing these properties, and with their established
working relationships with community stakeholders--such as tenant
associations--public entities are a valuable resource and can play a
role in the mark-to-market process. OMHAR staff is currently working
with HFA's on strategies for utilizing public entities in roles beyond
the PAE's role, in recognition of the value that we think they can add.
We have arrived at a balance in partners, in quality, in oversight,
and in timeliness that is working. And we are performing efficiently.
To date OMHAR has cost $66.2 million in PAE's staff costs and FHA
claims to achieve those savings of $895 million over 20 years. Looking
at the present value of those savings--$517 million--still shows a
7.8:1 savings to cost ratio. In other words, for every dollar of cost,
we save almost $8.
OMHAR has not yet reached its peak for completions of full debt
restructurings. We have seen improved results with a significant
increase in full restructurings since February. We have assets moving
through every stage of the pipeline; we and the PAE's have learned
much; we have become more creative in addressing the challenges, and we
have improved our timeliness with each passing month. We have developed
an expertise not easily or readily able to be replicated. We want to
finish the job we signed on to do.
This is echoed by another public PAE partner in a letter of support
recently submitted to the Subcommittee: . . . ``It would be a travesty
for the program to not
continue. OMHAR has learned lessons, adapted the program, and built
working
relationships with PAE's that will allow them to successfully
accomplish the goals
of MAHRA.''
What Do We Need To Complete the Job?
September 30, 2001, the sunset date called for in the MAHRA
legislation, is fast approaching. Planning must occur now to determine
the Government's approach to reducing rents on expiring Section 8
contracts after the sunset date. Without the legislative authority to
reduce a property's mortgage payments when its rents are reduced, HUD
will have to watch Section 8 properties struggle with excessive debt
burdens. Owners may cut back on maintenance to make ends meet, or
default on their FHA insured loans. The residents of these properties
are negatively impacted by failing properties. The resulting costs to
HUD exceed the costs of restructuring the mortgage debt under mark-to-
market.
Furthermore, with over half of OMHAR's staff on term appointments
that expire with sunset, the legislative authority to continue their
terms beyond sunset and keep this dedicated group of staff together is
key to the continued success of the program.
The Mark-to-Market Program and its stakeholders need an assurance
of continuity in order to maintain momentum, and to continue to bring
its benefits to the affordable housing units with Section 8 contracts
that are only now approaching
expiration. The ability to reduce a property's mortgage payments is
crucial for the mark-to-market mission of preserving affordable housing
at market rents. And we believe it benefits the financial savings goals
to address these workouts proactively and with the consistent
methodology and process that we have developed.
Mr. Chairman, I believe we have a compelling story to tell.
Affordable housing is being preserved for those in need, at a cost
savings to the taxpayer. There is nevertheless much work still to be
done. I believe with more time we will have a resounding success story
to tell.
Thank you, Mr. Chairman, I would be pleased to answer any
questions.
PREPARED STATEMENT OF CHARLES WEHRWEIN
Vice President
Mercy Housing, Inc.
June 19, 2001
Good morning, Mr. Chairman. My name is Charles Wehrwein. I am a
Vice President of Mercy Housing, Inc. and have had direct experience
with OMHAR and the M2M Program both at Mercy, and in a previous
position with one of the largest nonprofit preservation portfolio
acquisitions to date. I appreciate the opportunity to offer my comments
today on three issues: the progress being made in restructuring rents
and debt of the FHA insured Section 8 portfolio, the experience with
the operations of OMHAR and its team--including PAE's--and the savings
generated by restructurings and the overall impact on preservation of
affordable housing. These comments generally reflect the input of other
significant organizations in the community development field including
the National Housing Trust, LISC, the Housing Partnership Network, and
NEFPI.
Introduction: Mercy Housing
Mercy Housing is a nonprofit affordable housing developer, owner,
and manager headquartered in Denver, CO, with real estate interests in
many other regions throughout the Nation. In our 20 year history, we
have developed nearly 11,000 units of affordable housing serving more
than 27,000 low-, and very low-income Americans on any given day. Mercy
Housing regards the preservation of affordable rental housing as
essential to the stability and revitalization of communities and the
residents who so desperately need this housing, both now and in the
future. Mercy and others who work in the community development field
remain deeply concerned about the future of preservation in general,
and the Mark-to-Market Program specifically. To that end, Mercy is
launching a targeted preservation initiative that will focus
significant human and financial resources on this critical problem.
Case Study: Mercy Housing's Decatur Place, Denver, CO
Before commenting on the specific issues and policies around the
M2M subject, it is helpful to add some real context to the discussion.
In that regard, I would like to share with the Subcommittee a specific
example of M2M in action.
Mercy owns a 106 unit Section 8 assisted property in Denver, CO.
This property serves the transitional housing needs of distressed
families--that is where a spouse with children has been in an abusive
relationship and has had to leave home with virtually nothing. This
property's Section 8 contract expired and it was subject to M2M. The
M2M restructuring at Decatur is nearly complete and is expected to
close within the next month or so.
An example of a typical resident is Caroline Garcia. She and her
four children escaped an abusive relationship with nothing more than
the clothes on their backs. She had little education and no job when
she arrived at Decatur Place. When told she would have to reside in a
two-bedroom apartment until a three-bedroom became available, she said
it would be much better than the single room apartment they just left.
Her first month, she was able to contribute only $4 per month for rent.
She immediately went to work part-time at the cafeteria where her
children attended school. She also took life skills training provided
by Mercy at the site, including parenting, financing and computer
training. In just 2\1/2\ years, she has completed her education and is
now working full-time as a medical transcriber. Her children are
healthy and strong, and doing better in school. And she is now
contributing $386 per month for rent.
This is a great example of the contribution that assisted housing
makes in our community. Were it not for the M2M Program and the
commitment of staff of OMHAR--both the national office and the San
Francisco field office--the Colorado Housing Finance Agency (CHFA), the
City of Denver and the committed staff and resources of Mercy Housing,
this property could not have been sustained.
Progress of Restructuring of the FHA Insured Section 8 Portfolio
The progress of restructurings, which began far to slowly, has now
picked up dramatically. In our view, it is solely because of the new
owner and nonprofit incentive guidelines that were adopted by OMHAR in
fall of 2000. They were created through a cooperative approach that
brought together stakeholders from across the spectrum that is a great
example of how Government should work. These new guidelines, among
other things, recognize and allow for a more fair economic treatment of
nonprofit purchasers relating to the ongoing costs of ownership and
provide for some additional debt relief to encourage nonprofits to
pursue purchases of M2M properties. The nonprofit buyer, in turn,
commits to an extended period of affordable use. They also provide for
improved processing and returns of equity to existing owners that
recognize the economics associated with extending affordable use.
Prior to these new guidelines, it was simply uneconomic to take on
these properties. While the economics are still marginal under the
incentives, they make it probable that long-term nonprofit owners can
own and operate these properties over time and actually cover some of
the costs of ownership. They also recognize the
extended affordability commitment by existing owners and have
dramatically
increased the number of restructurings that have occurred with this
group. We
applaud OMHAR's recognition of the inequity in treatment of nonprofit
owners and the resultant risk of additional affordable housing losses,
and their response to this problem. Without these new incentives, the
number of restructurings, especially full restructurings, would not
have increased materially and the program would have been a failure.
Extending the authorities present under MAHRA will allow sufficient
time for the backlog of these complicated transactions to be completed.
It will send a clear and strong message to the entire housing community
that Congress is committed to sticking with a consistent approach once
it works. This will help to eliminate the potential for stalling by
those who would attempt to wait for another program change before
acting. It will also allow more nonprofit purchasers to line up the
additional resources necessary to help preserve these assets for the
future.
We strongly support the extension of authorities beyond their
scheduled expiration at the end of fiscal year 2001. We recommend that
Subtitle A, of MAHRA be extended for at least 5 years. Furthermore, we
strongly encourage the Subcommittee to recognize and affirm the
importance of the new incentives and guidelines implemented by OMHAR,
as they are critical to the recent success of the M2M Program. Finally,
we specifically call the Subcommittee's attention to the need for
continued funding of Intermediary Technical Assistance Grants (ITAG)
and Outreach and Training Grants (OTAG) at a level equal to the
previous years' $10 million per year or higher. We further recommend
that the Department expedite the availability of these funds to their
intermediaries charged with disbursement.
Experience Working with OMHAR and Its Team
OMHAR was clearly slow getting out of the gate, both in organizing
its operations and in naming and contracting with Participating
Administrative Entities (PAE's). The reasons for this are many
depending on one's point of view. Creating an organization from scratch
is difficult and time consuming under the best of circumstances. Add to
the mix creating this organization in a politically charged atmosphere
where salaries and contracting procedures are more limited than in the
private sector, and it seems in hindsight that a period of 3 years to
both create OMHAR and complete all necessary transactions was
optimistic at best.
Experience with OMHAR's national office staff and consultants
suggests that they are extremely competent from a technical standpoint,
are willing to work with all stakeholders, and they have worked very
hard to get this program underway once the organization was up and
running. The consolidated expertise in the national office is
especially effective at dealing with the myriad complications that many
of these deals bring.
The assessment of OMHAR's field staff from the perspective of many
nonprofit stakeholders is more variable. The largest problem overall
seems to be the effectiveness of communication of national office
policies and positions and the assurance that these policies and
procedures are being followed consistently. This problem
is exacerbated by the fact that OMHAR has been unable to fill open
positions due
to their impending sunset. More time to accomplish this important task
and more
certainty about the future of OMHAR would alleviate many of the
problems in
this area.
Experience with public PAE's has been mostly positive, and my
personal experiences with Housing Finance Authorities in Colorado and
Missouri have been outstanding. These PAE's have a very good sense of
their markets and the standards housing should meet in those markets.
Overall, the staff at the public PAE's seems competent and
professional. Public PAE's have a better understanding on how to
appropriately strike a balance between cost savings and quality
affordable housing.
As with the rest of the M2M implementation, it is taking some time
for all of these entities to get up to speed with what is effectively a
new program. Like the comment above, time and certainty will improve
this experience more still.
From a programmatic standpoint, we would like to see a more direct
linkage between HFA and other State and local housing resources and
preservation, and would strongly support new funding allocated to the
States to accomplish this goal. This leveraging of, and link to, more
locally driven housing resources would strengthen the link between the
public PAE and the HUD-assisted/insured assets in their communities.
The Federal matching grants provisions of the legislation
proposed in H.R. 425 and proposed in the past by Senators Sarbanes,
Kerry,
and Santorum (Section 401 of S. 2733 introduced last year) would be an
excellent
vehicle to accomplish the linking of State and Federal resources and we
strongly
support it.
Experience with the private PAE's has been generally good. As with
my comments earlier on OMHAR field offices, communications of national
policies and priorities could be improved upon. Their nature as profit-
motivated contractors sometimes leads to less ownership of a deal when
compared to public PAE's and possibly a focus on cost considerations
versus the quality and context of the property at the local level.
In conclusion, whatever the reasons for the delays in getting OMHAR
off the ground, it is now working. It is a singular businesslike unit
in the Federal Government that is competent and improving and it would
be a waste of the taxpayer's resources invested to date, to let it
expire, or otherwise reconfigure it, just as it is beginning to reach
its potential. This would be analogous to building a factory, creating
new tooling, training new employees, and then closing it down just as
production got underway. The work it was created to do is not yet done.
Based upon my experience as a Deputy Assistant Secretary for
MultiFamily Housing at HUD/FHA, it is my strong feeling that
transferring the OMHAR staff into the HUD mainstream will at best,
create serious delays of 6 months or more as it is assimilated into the
system, and more probably, cripple the program. As it stands today,
OMHAR is a model for future Government program operations. It is a
small, lithe organization with specific technical skills that allow it
to be responsive to stakeholders and objectively judged by Congress. If
it is assimilated more directly into HUD, and especially if its wage
scale and special contracting flexibility are taken away, many key
staff will either leave for the private sector, or be drawn into other
responsibilities at the Department. Therefore, I urge you to extend the
OMHAR organization in its current configuration by extending Subtitle D
of MAHRA for 5 years or more. I would also encourage Congress and the
Administration to consider other ways that this technical capacity
could be used to deal with more problem assets or asset categories
throughout the assisted/insured HUD portfolio. For example, these same
skill sets would be useful to HUD in dealing with ``work outs''--for
example where insurance claims have been paid or where the Secretary
has taken ownership of a property through foreclosure.
Preservation and the Cost of the M2M Program
As to the question of the cost effectiveness of the program we
cannot provide the Subcommittee with the specific costs of the program
versus projections that are
5 years old or more. What we can comment on, however, is the cost
effectiveness of preserving this limited and essential affordable
housing. Anecdotally, the cost of purchasing, rehabilitating and
preserving existing rental housing is often in the range of $20,000-
$40,000, which compares very favorably to the cost to build new and/or
the permanent loss of potentially hundreds of thousands of units from
the affordable housing inventory.
The conclusion here is clear. Even if the marginal cost of
restructuring mortgages and reunderwriting projects results in a modest
increase in costs--which we do not assume here--failure to act would
result in both higher replacement costs and/or the loss of
irreplaceable housing resources that the Government has already
invested billions of dollars in. Preserving the existing assets and the
project-based contracts associated with them is good public policy and
good fiscal policy and we believe that OMHAR and the M2M Program are
effective tools in accomplishing these public policy goals and should
be extended.
Finally, mission driven organizations like Mercy Housing, the
National Housing Trust, the Housing Partnership Network, NEFPI, and
LISC and its Community Development Corporation partners are ready to
help serve the public purpose of preserving the valuable investment
that our Nation has made in affordable housing. To that end, these
organizations need capital support to be able to preserve and maintain
this housing over the long term. We strongly support legislation that
would accomplish this like that proposed in Section 402 of S. 2733
introduced by Senators Sarbanes, Kerry, and Santorum last year, with
funding limited to those direct and intermediary nonprofit
organizations that have a demonstrated track record and commitment
toward the development and long-term ownership of affordable housing.
This concludes my testimony. I appreciate the opportunity to be
with you today and share our experiences. I would be happy to respond
to any questions you have and to work with your staff to follow-up on
or amplify any issues brought to light.
PREPARED STATEMENT OF BARBARA J. THOMPSON
Director of Policy and Government Affairs
National Council of State Housing Agencies
June 19, 2001
Mr. Chairman and Senator Allard, I am Barbara Thompson, Director of
Policy and Government Affairs for the National Council of State Housing
Agencies (NCSHA). I will become NCSHA's Executive Director on July 1.
NCSHA represents the Nation's State Housing Finance Agencies
(HFA's). Richard Godfrey of your own State, Mr. Chairman, is NCSHA's
Secretary.
Thank you for this opportunity to testify about the future of the
Section 8 restructuring program and the experience of State HFA's
serving in it. Before I turn to that, however, I want to thank the
Chairman, Senator Allard, and the many other Subcommittee Members who
cosponsored and helped enact legislation in the last Congress to
increase substantially and index for inflation the caps on tax-exempt
private activity bonds (Bonds) and the Low Income Housing Tax Credit
(Housing Credit). Now, tens of thousands of additional lower-income
families each year will buy their first home or rent a decent,
affordable apartment.
Unfortunately, many people qualified to receive housing help under
these programs still will not get it. Three obsolete provisions prevent
it: the Ten-Year Rule, which forbids States to recycle billions of
dollars in MRB mortgage payments to make new mortgages; MRB purchase
price limits, derived from 8 year old home sales price data, despite
dramatic increases in home prices in the last 8 years; and Housing
Credit income eligibility rules, which make development infeasible in
many very low-income, frequently rural, areas.
Senators Breaux and Hatch introduced S. 677, the Housing Bond and
Credit Modernization and Fairness Act of 2001, to fix these problems.
Thank you, Senator
Allard, for your early cosponsorship. We urge all Subcommittee Members
to cosponsor S. 677 soon and to press your leadership and Finance
Committee colleagues to include it in a tax bill this year.
NCSHA and our member State HFA's worked very closely with the
Congress to help create the Section 8 restructuring program, to
preserve Section 8 properties while reducing subsidy costs to the
Federal Government. With the support of Congress and the industry, we
fought successfully to ensure that the restructuring program provided
qualified State and local public agencies a priority right to serve as
restructuring agents, to ensure that restructurings were carried out in
a manner that protects the interests of the Federal Government, the
properties, the residents, and the surrounding communities.
Regrettably, the Office of MultiFamily Housing Assistance Restructuring
(OMHAR) has failed to utilize the talents of State HFA's, as Congress
intended. Instead, OMHAR has treated HFA's as automatons, prescribing
their every move and stifling their creativity.
Accordingly, we urge the Subcommittee to reauthorize the
restructuring program, but place responsibility for it in HUD's Office
of Housing, as both the Senate Appropriations Committee and the
Administration have proposed. We further recommend that you direct HUD
to delegate responsibility for restructurings on a priority basis to
qualified and willing State and local HFA's, with reasonable HUD
oversight, as Congress always intended.
State HFA's and the Federal Government Are Strong Housing Partners
During the last three decades, State HFA's have assumed a primary
role in financing affordable housing. Their success in blending
business-like efficiency with accomplishing their public mission has
earned HFA's the respect of the Congress, their States, and the
community at large.
Congress, in turn, has entrusted States with administering the Bond
and Housing Credit programs, the only Federal programs dedicated to
financing lower-income, first-time homebuyer mortgages and low-income
apartment construction.
With Bonds and the Housing Credit, State HFA's have financed more
than two million first-time, lower-income homebuyer mortgages and over
two million apartments, including 1.2 million with the Housing Credit.
They have issued nearly $140 billion in Bonds without a default and
with foreclosure and delinquency rates far lower than industry
averages.
State HFA's have accomplished these outstanding results because
Congress has permitted them to employ Federal resources flexibly to
respond effectively and imaginatively to their unique and diverse
housing needs. Congress has enlisted HFA's to apply their expertise,
experience, and knowledge of their communities to solve housing
problems particular to their own States. That is why the Bond and
Credit programs are so successful, and that is why Congress increased
authority under those programs by nearly 50 percent last year, the
largest single increase in Federal housing assistance ever.
State HFA's have also been strong and successful partners with HUD,
when HUD has permitted them to use their talent and expertise to do the
job. Most recently, 33 State HFA's have successfully assumed HUD's
responsibility for the administration of 750,000 Section 8 project-
based units. More than 30 State HFA's participate in the FHA-HFA risk-
sharing program, under which HUD allows them to use their own proven
multifamily underwriting standards, just as they do in the Bond and
Credit programs.
Empower the States to Do the Job Congress Intended Them to Do
Congress intended States to have this same decisionmaking authority
and flexibility to respond to their housing needs and conditions when
it gave them priority to serve as Participating Administrative Entities
(PAE's) in the Section 8 restructuring program. HUD Appropriations
Subcommittee Chairman Bond, Floor Manager of the Fiscal Year 1998 HUD
Appropriations Bill, which contained the restructuring legislation,
made that clear on the Senate floor when he said, ``Indeed, devolving
responsibility and decision-making to the State and local level is one
of the primary goals of this Mark-to-Market legislation. Not
surprisingly, that is also the reason for the priority in selecting
State and local housing finance agencies to be PAE's.''
Senator Mack, then Chairman of the Housing Subcommittee, who wrote
the restructuring legislation, further elaborated on how Congress
expected OMHAR to work with HFA's in a July 1998 Senate floor colloquy
with Senator Bond on the Fiscal Year 1999 HUD Appropriations Bill. The
Senator said, ``HFA's have proven that they have the capacity and
willingness to serve as the Federal Government's partners in affordable
housing . . . I expect HUD to approve many HFA's as PAE's and provide
them as much flexibility as possible within appropriate parameters to
administer the (permanent) program.''
However, OMHAR either never understood or chose to ignore the
Congress' will that HFA's, not OMHAR, do the restructuring work. From
the start, OMHAR has dictated down to the finest detail every step
HFA's must take in restructuring properties. It has denied HFA's the
ability to apply the very expertise, judgment, knowledge of their local
housing markets, and concern for properties, communities, and tenants
that caused Congress to choose them to do this work in the first place.
In August 1999, NCSHA's Executive Director John McEvoy and
Massachusetts Housing Finance Agency Executive Director Steven Pierce,
in testimony before this Subcommittee, told the story of OMHAR's heavy-
handed micromanagement and bureaucratic interference. With your
permission, Mr. Chairman, I would like to submit their statements for
this hearing record for the benefit of those Senators who were not then
Members of this Subcommittee.
At the time of that hearing, nearly 2 years after the program's
enactment, two-thirds of State HFA's approved by HUD to participate as
PAE's were still trapped in seemingly endless negotiations with OMHAR
on their contracts, OMHAR had
released its encyclopedic Operating Procedures Guide (OPG), and not a
single full
restructuring had been completed.
At that hearing, nearly 2 years ago now, NCSHA strongly urged OMHAR
to abandon its prescriptive approach and release the expertise,
mission-oriented judgment, and experience of the State HFA PAE's to
carry out the work Congress intended them to perform. In response to
NCSHA's and his own State's testimony, then Ranking Minority Member
Kerry said, ``We ought to be able to reduce the bureaucracy, which is
everybody's enemy, and see if we cannot streamline this thing in a way
that makes more sense.''
That same fall, in its HUD appropriations report (Senate Rpt. 106-
161), the Senate Appropriations Committee said:
The Committee is further concerned that the Department's
staffing justification for OMHAR does not reflect its roles and
responsibilities as en-
visioned by the ``Mark-to-Market'' legislation. OMHAR and HUD
have not
provided the Committee any convincing evidence that 101 staff
is needed
to run a program that was envisioned to be implemented
primarily by publicly accountable third parties, namely State
and local housing finance agencies. While the Committee
appreciates OMHAR's efforts to ensure public accountability,
the Committee is concerned that the procedures and processes in
place may be overly prescriptive and potentially result in
delaying the completion of transactions. The intent of mark-to-
market was to provide as much flexibility as possible within
reasonable parameters to allow the third parties to perform
their duties in an efficient and effective manner. The role of
OMHAR was to ensure that proper procedures were in place,
qualified and publicly accountable entities were selected to
act on behalf of the Federal Government, and to perform post-
audit oversight duties after a reasonable period of time and
number of deals were completed. It is not evident that HUD and
OMHAR have structured the program to meet the intent of the
law.
Despite Congress' admonitions, little changed until more than a
year later, after the Senate Appropriations Committee recommended in
its fiscal year 2001 HUD appropriations report (Senate Rpt. 106-410)
that OMHAR's functions be transferred to HUD's Office of MultiFamily
Housing beginning in fiscal year 2001. The Committee said, ``the
program has been fraught with delays due to unnecessary and prolonged
negotiations tactics by OMHAR, an overly prescriptive operating guide,
and the inability to fully utilize State housing finance agencies that
were intended by Congress to administer most of the restructuring
activities.'' The Committee encouraged OMHAR ``to streamline the
restructuring process and provide the flexibility necessary for the
State housing finance agencies to administer the program as intended by
the Congress.''
Since then, OMHAR has made some progress, though too little, very
late. It has completed the restructuring of more than 100 properties,
due in significant part to its new owner incentives, which have brought
previously reluctant owners to the
negotiating table and helped PAE's expedite transactions.
OMHAR also finally reduced the requirements of its OPG, 3 years
into the program. It was not until January 2001 that OMHAR issued its
completed, revised guide. The changes it contains still do not go
nearly far enough toward streamlining and simplifying the program.
Bureaucracy Still Rules
Despite its progress, OMHAR continues to value process over
product, rules over results. Its guidance to PAE's remains overly
prescriptive, confusing, needlessly complex, ever changing, and
inconsistently interpreted and applied by its own staff. The OPG has 22
separate appendices and requires the use of 86 forms to process a
single transaction. OMHAR has issued 79 ``policy'' emails to PAE's in
the past 14 months, each containing an average of two to three policy
changes.
OMHAR continues constantly to change its requirements and
processes, rarely do these changes contribute to meaningful
streamlining or program simplification. Often changes are not clearly
communicated to the PAE's. Sometimes they are not communicated at all.
For example, OMHAR criticized one State HFA for using an ``old'' form.
When the HFA pointed out that it retrieved the form from OMHAR's
website and its date was more current than that of the form OMHAR said
it should have used, OMHAR told the State to ignore the form on its
website, since it had been posted for such a short time, and use the
old form instead.
OMHAR's ``Financial Model,'' which it requires PAE's to use to
calculate the ``necessary'' financial outcome in a restructuring, is
over 40 pages long, unnecessarily complex and unwieldy, and leaves
little room for State underwriting judgments. The model has gone
through five revisions, each one resulting in a more complex model than
the previous one. Regardless of how far along a transaction might be
under one financial model, OMHAR requires that it be submitted for its
review under the latest model.
OMHAR runs a command and control operation, delegating little
authority to its regional offices. Both OMHAR headquarters and its
regional offices review restructuring proposals simultaneously.
Frequently, the regional office will tell a State HFA to proceed one
way, only to be reversed later in the process by headquarters. In
addition, communication and coordination between OMHAR and HUD is poor.
Many times PAE's are bounced back and forth between OMHAR and HUD for
information and decisions.
HFA's also report that OMHAR's constant second-guessing has
resulted in multiple project underwritings, delaying results and
undermining their ability to negotiate effectively with owners. Many
HFA's find that OMHAR is more interested in saving money than in
preserving properties for the long-term. OMHAR frequently questions HFA
market rent and rehabilitation needs assessments, despite its lack of
familiarity with the properties and local market conditions. For
example, OMHAR initially rejected one State HFA's recommendation that
an elevator be installed in a multistory elderly housing property with
a prolonged high vacancy rate on its upper floors. When OMHAR finally
relented and an elevator was installed, the vacancy rate dropped
significantly. While the HFA achieved the right outcome for the
property, it involved unnecessary hassle and costly delay.
OMHAR imposes very strict timeframes on PAE's, yet it imposes no
similar discipline on itself. State HFA's report prolonged delays by
OMHAR in responding to their requests. OMHAR frequently loses
paperwork, requiring HFA's to resubmit the same information time and
time again. OMHAR refuses to relieve PAE's from deadlines which its
actions, or more frequently, inaction, cause them to miss.
OMHAR's Internet Tracking System and Resource Desk are seriously
flawed and deficient. Costly to establish, they have failed to
significantly facilitate the restructuring process. OMHAR scrapped the
tracking system for a 2 month period last summer because it was fraught
with software glitches. The Resource Desk at last count contained over
1,500 questions, with answers that are often ambiguous and inconsistent
with responses to other similar questions.
OMHAR's conflict of interest certification requirements are
overreaching. They require PAE's to execute a separate certification
for each assigned asset on behalf of all ``restricted persons.''
``Restricted persons'' is so broadly defined it includes PAE staff,
board members, and third-party contractors and their employees. For one
State, this amounts to over 60 individual certifications to accept a
single asset from OMHAR. The same State engaged an environmental
contractor to complete an environmental review who determined that to
meet OMHAR's requirements, the employees of the laboratory performing
tests on asbestos and lead-paint samples had to sign certifications!
The Cost of OMHAR's Intransigence
For some time, policymakers will debate the number of Section 8
properties lost and Federal subsidy savings forfeited due to OMHAR's
insistence on doing it its way. But there is another cost: the loss to
the restructuring program of State HFA's expertise, judgment,
experience, and commitment to public purpose.
In August 1999, NCSHA told this Subcommittee that OMHAR had driven
at least two qualified HFA's out of the program and was on a course to
drive out others. That statement proved prophetic. Of the original 42
State HFA's approved as PAE's, only 22 remain in the program today. A
number of those are actively considering withdrawing.
Some State HFA's decided not to sign contracts with OMHAR,
believing they could add little value to the program given OMHAR's
prescriptive approach. A number participated the first year, but
declined to renew their contracts, severely frustrated with OMHAR's
unreasonable and irrational rules and failure to assign them assets.
Still others have been forced out of the program by OMHAR, often
without any explanation. Some remain in the program, but are inactive
because OMHAR gives their assets to private PAE's, often without their
knowledge or agreement, as the restructuring law requires.
Your own agency, Mr. Chairman, the Rhode Island Housing and
Mortgage Finance Corporation (RIHMFC), last April received written
notice from OMHAR that it would not renew its contract. In that
communication, OMHAR gave no reason for terminating the relationship.
OMHAR never granted RIHMFC Executive Director Richard Godfrey's request
the previous July for a meeting with its director to discuss Rhode
Island's concerns with the restructuring process.
The New Hampshire Housing Finance Agency (NHHFA) recently
terminated its contract with OMHAR after OMHAR informed the agency by
telephone in late January of its unilateral decision to withdraw
NHHFA's first full restructuring asset--assigned earlier that month--
and reassign it to a private PAE. In response to NHHFA's letter
objecting to the transfer, the OMHAR director wrote, ``The decision was
solely based on the fact that as of the end of January 2001, due to the
limited number of available New Hampshire assets, NHHFA had not yet had
the opportunity to undertake a full mortgage restructuring.
Consequently, and recognizing admittedly, the complexity of the M2M
Program and the learning curve of all PAE's, it did not seem in the
best interest of NHHFA or OMHAR for NHHFA to go forward with this,
perhaps the only available, full mortgage restructuring. Unfortunately,
this was presented to you as a final decision, rather than a point of
discussion.'' I would like your permission, Mr. Chairman, to submit
this correspondence, and that of the RIHMFC with OMHAR, for the record.
Implement the Plan Congress Wrote
Mr. Chairman, Congress wrote the right plan when it gave priority
to public PAE's to carry out Section 8 property restructurings subject
to OMHAR's oversight. The problem is OMHAR never implemented that plan.
With OMHAR's scheduled sunset, you have an opportunity to insist on
the system that you established nearly 4 years ago, a system under
which the responsibility for restructuring Section 8 properties is
delegated on a priority basis to capable and willing State and local
public agencies with reasonable Federal oversight and accountability to
the Federal Government, their States, communities, and residents.
We believe the Administration is committed to implementing that
system. We urge that the restructuring program be reauthorized, but
responsibility for its implementation be transferred to HUD, as the
Administration proposes. If OMHAR is retained, it should lose its
independent status. Its director should report to the FHA Commissioner.
We further recommend that Congress direct HUD to review and streamline
OMHAR's rules and procedures and devolve greater decisionmaking
authority under it to qualified public HFA's.
Some will say HUD does not have the capacity to take on this
responsibility. We disagree. We are not suggesting that HUD perform
Section 8 restructurings. We are asking that HUD oversee State and
local HFA's and others who qualify to do the restructuring work.
Some will say leave OMHAR alone. It is not perfect, but it is a lot
better than it was. We must not settle for that. Too much restructuring
work remains to be done. Too much is at stake.
Thank you, Mr. Chairman, for this opportunity to testify. NCSHA and
the State HFA's are committed to working with you to set the Section 8
restructuring on the course Congress intended.
----------
PREPARED STATEMENT OF JOHN BENTZ
President, Property Advisory Group, Inc.
Director of the National Leased Housing Association
June 19, 2001
Mr. Chairman and Members of the Committee: My name is John Bentz,
President of Property Advisory Group, Inc. of Providence, Rhode Island
and a Director of the National Leased Housing Association, on whose
behalf I testify today. I am accompanied by Denise Muha, Executive
Director of NLHA and Charles L. Edson, Association Counsel. We thank
you for the opportunity to appear before you today.
As a matter of background, for the past 30 years, NLHA has
represented the interests of private sector participants in the Section
8 program including owners, managers and lenders, as well as housing
authorities and other public officials who administer various HUD
programs including the Section 8 Voucher Program. We will focus our
comments on this hearing's important issue concerning the future of the
Office of MultiFamily Housing Assistance Restructuring (OMHAR) and the
Mark-to-Market Program, both of great concern to our members.
The Future of OMHAR
As you are aware, OMHAR's authorization expires on September 30
placing squarely before Congress the issue of whether that entity is to
continue. It is generally recognized that OMHAR got off to a slow and
rocky start and did not really hit its stride until about a year ago.
The program was new, OMHAR was not fully staffed, and owners were
naturally wary of a program that could have significant negative
consequences to the project and their investors. Indeed, OMHAR did not
complete its 100th restructuring until a few months ago--over 3 years
from the Agency's creation in 1997.
We have reached a point where OMHAR appears to be functioning at a
higher level. Nearly 140 mortgages have undergone full debt
restructuring with 25 to 30 mortgage restructurings expected to close
each month through September. Further, OMHAR has approved and
implemented hundreds of OMHAR Lites--a lowering of Section 8 rents to
market without debt restructuring.
Recognizing the need to attract more owners, OMHAR itself has made
significant reforms to make restructuring more attractive to owners.
These reforms include the possibility of enhanced asset and project
management fees and allowing interest on the owner's required deposit
to reserves as an eligible project expense. In other words, OMHAR has
shown that it does listen and that it can implement significant changes
while implementing its program and we anticipate that issues brought to
OMHAR's attention will continue to be addressed.
At this point, the termination of the Mark-to-Market Program does
not appear practical. Because of the continuing high costs of Section 8
subsidies, a replacement mechanism would need to be developed with no
promise of anything better. The question does arise, however, as to
whether or not OMHAR should be continued in its present form, or
whether the Mark-to-Market Program should be melded into HUD's regular
multifamily program activities.
For a number of reasons, NLHA feels that the Mark-to-Market Program
must continue to be separately administered. Whether it is administered
by an entity called OMHAR or named something else is not the most
important question. We would not object if OMHAR were to be continued
in its present form. We also understand, however, the argument that the
OMHAR Director should report to the FHA Commissioner, and not directly
to the Secretary and Congress, and would understand if a decision were
made to bring OMHAR into the Office of the Assistant Secretary of
Housing.
If this is done, however, we caution you as follows: First, we
think it would be a mistake to simply fold the mark-to-market
activities into the Department's regular multifamily monitoring
activities. Such a move would unduly burden staff already stretched by
retirement and attrition. The mark-to-market process is highly complex
and benefits greatly from having well trained and specialized staff
focused exclusively on its mission. Second, OMHAR has attracted some
very talented and experienced staff members. We believe that their
retention is essential to the continuation of the Mark-to-Market
Program without causing fatal interruption. We understand that moving
mark-to-market into the Office of Housing raises some pay rate and
other personnel issues. We hope that these can be resolved in order to
maintain and build upon the momentum that has been generated, short of
dismantling the current OMHAR staff.
Mortgage Restructuring
Implicit in our previous discussion is our view that the mortgage
restructuring mechanism adopted in the fiscal year 1998 VA/HUD and
Independent Agencies Appropriation Act should continue as long as
Section 8 rents are to be based on comparable market data. There are
400 properties that are anticipated to be eligible for debt
restructuring in fiscal year 2002 alone. Without the legislative
authority to restructure the debt on these properties, the FHA
insurance fund will be forced to absorb a high level of mortgage
defaults when properties undergo a rent reduction with unsatisfactory
burdens being placed on owners and residents.
Changes to Restructuring
Although OMHAR has been responsive to a number of suggestions from
the housing community, there are other changes that could be made to
make the program attractive to owners--many of these would require
changes to the statute. NLHA is holding its annual meeting this week
and we will use this opportunity to develop specific legislative
recommendations that we will submit to you within the next few weeks.
They will likely include the following:
There is now a statutory requirement that owners share in
necessary rehabilitation costs. This creates an unacceptable burden
for owners in many instances. We are dealing with older properties
by definition, which often need significant re-
habilitation. Owners are generally limited partnerships, with
general partners who are typically unable to respond to cash calls
for any number of reasons. We suggest that the statute be changed
to permit the rehabilitation to go forward without the requirement
of owner contribution.
While there is an exception rent standard that would permit
the restructuring of mortgages where the comparative market rents
are too low to support project
operations, the standard is too rigid for productive use in many
instances. The Mark-to-Market Program generally, by setting rents
in accordance with market comparable properties, results in lower
rents for properties located in rural areas and in depressed inner-
city urban areas. These are often the properties that need
assistance the most.
In this regard, the statute provides that, in most cases, exception
rent levels are to be limited to 120 percent of HUD approved Fair
Market Rents (FMR's). While on first glance that might appear fair, in
fact it results in significant rent reductions for some properties
which--because of age, security costs, utility costs, and so forth--
require higher rents if they are to be operated successfully. We do not
believe that the Government intends to withdraw its support for helping
low-income tenants in depressed rural areas, or in impacted urban
neighborhoods, but this is what the current program in many cases,
requires.
Similarly, in the case of these exception rent projects, OMHAR
and owners must agree on appropriate expense levels on which to
build exception rents. In some instances, this has proven
impossible, where OMHAR simply disagrees with historical operating
costs of properties, and owners are of the belief that the OMHAR-
required expense reductions would inevitably lead to the failure of
the properties. A better mechanism needs to be found to resolve
these issues.
Properties with insured mortgages and HUD held mortgages are,
in some instances, treated differently. Properties with insured
mortgages, where some first mortgage debt is to remain, can have
those mortgages restructured using Section 223(a)(7). This
treatment is not now available for HUD held mortgages, where
Section 223(f) refinancing is required. The Section 223(f) process
contains many more restrictions, and takes months longer to
process, resulting in unnecessary costs and delays. On the other
hand, Section 223(a)(7) mortgages have a term limit which ends 12
years after the current mortgage term, which should be made
consistent with the Section 223(f) program, that generally provides
a maximum 35 year term. Such a change would eliminate the third
mortgages that are often required as part of the restructuring.
Third mortgages raise additional tax concerns for owners.
When the Mark-to-Market Program was developed, it was
anticipated that full debt restructurings would be processed more
quickly than has occurred. We believe, this is because no one
appreciated many of the complicated scenarios that arise when
dealing with owner issues. Those issues include obtaining limited
partner consents, extending partnership terms to coincide with
restructured mortgage terms, financing issues, and expense
determinations. During processing, when existing Section 8
contracts or contract extensions expire, the owner too often finds
that its rents are being reduced to market without the benefit of
the restructuring, which is still in processing or negotiation.
Thus, the village is destroyed while being saved. Significant
additional flexibility is needed on this point.
Overall, we must remember that we are dealing not with a short-term
problem, but with a long-term issue. The statute requires that
properties going through full debt restructuring commit themselves to
at least 30 years of Section 8 usage, as long as Section 8 subsidies
are available, and that rents shall increase on the basis of an annual
Operating Cost Adjustment Factor (OCAF). The program as now constituted
does not provide for a way to increase rents or attract other funds to
accommodate unanticipated emergency situations. For example, this
year's utility rise in many parts of the country would take a long time
to be reflected in OCAF adjustments, if they ever are. Similarly,
project specific rehabilitation needs, or increased security needs,
which may not be evidenced in market comparable properties, are not
being addressed. In other instances, we will find, through hindsight,
that project underwriting was not all that it could have been. Some
mechanism must be developed to permit flexibility in appropriate
circumstances to avoid project failure at a later date.
Thank you very much for the opportunity to share our views. We look
forward to working with the Subcommittee as these issues are addressed.
Please contact NLHA's Executive Director, Denise B. Muha, with any
questions regarding the Association's testimony.
----------
PREPARED STATEMENT OF CATHY VANN
President, Ontra, Inc.
June 19, 2001
Background/Testimony Perspective
I am presenting this testimony today as the President of and on
behalf of Ontra, Inc., as a Private PAE for OMHAR. By way of placing
this testimony in perspective for the Subcommittee please note that
throughout its entire 16\1/2\ year tenure Ontra has been involved in
the due diligence, asset management and disposition of over $8.5
billion in distressed mortgage and real estate assets in 45 States and
Puerto Rico. The clients for whom Ontra has provided professional
distressed asset servicing have included but are not limited to the
Texas Housing Agency, FSLIC, FADA, FDIC, RTC and numerous Texas banks
and S&L's. In addition Ontra has received ``Above Average'' ratings
from all four Wall Street Investor Rating Agencies to facilitate its
participation as the Special Servicer and equity partner in over $2.5
billion in distressed mortgage and real estate asset acquisitions with
AIG, Citicorp, CS First Boston, and Goldman Sachs. Approximately $1
billion of these acquisitions involved a partnership with AIG and the
Federal Government through the RTC S and N Series disposition program.
Ontra commenced its contract with OMHAR in July of 1999. Since
contract inception Ontra has been assigned 120 Rent Restructurings
(Lites), 118 Debt Restruc-
turings (Fulls) and 22 Comparability Reviews. In the interest of time
the following results are provided for the written record and I will
address them in summary in the discussion regarding Government savings
below.
For Rent Restructurings/Lites
------------------------------------------------------------------------
Result No. of Assets
------------------------------------------------------------------------
Assigned............................................... 120
Completed.............................................. 112
Remained a Lite........................................ 55
Converted to Full...................................... 41
Owner Opt Out.......................................... 5
Ineligible (Below Market).............................. 8
Withdrawn.............................................. 3
------------------------------------------------------------------------
For Full Debt Restructurings/Fulls
------------------------------------------------------------------------
Result No. of Assets
------------------------------------------------------------------------
Assigned............................................... 118
Converted to Lite...................................... 19
Closed................................................. 31
Completed.............................................. 9
Owner Opt Out.......................................... 4
Failed Fulls........................................... 5
Ineligible (Below Market).............................. 3
------------------------------------------------------------------------
In order to provide the services for this contract, Ontra
management historically dedicated 23 individuals to the delivery of the
required services and currently has 16 staff members fully engaged in
the process.
The remainder of my testimony represents the results of a
canvassing effort in February of this year whereby I surveyed all of
the 8 other Private PAE's in response to a request from the GAO to
participate in a panel discussion regarding the disposition of the M2M
Program and OMHAR's operations.
Progress in FHA Insured/Section 8 Portfolio Rent and Debt
Restructurings
The Program definitely experienced a slow start from the Private
PAE's perspective. There were two essential drivers of this situation
as follows:
For the first 12-18 months of the program the owners appeared
disengaged and largely convinced that if they stalled, M2M would go
away and in all fairness there was little incentive for an owner to
participate willingly given the financial structure at that time.
The owner's incentive package was introduced in September of 2000
and since January of 2001 there appears to be gaining momentum in
the owner community to contemplate, comprehend and engage the
program.
The program is very complex and has required significant ramp up
and learning curve maturation in an ever changing environment. Please
note the following items, which speak to the complexity issue.
The heart of the Restructure Transaction is represented by a
45-page model that includes all of the basic MAHRA business rules.
In addition to eight schedules providing standard real estate/
mortgage analysis such as Operating Budget Analysis, Long-Term
Capital Reserve Analysis, Debt Sizing, Amortization, Claim Sizing
and Net Savings it includes an additional six schedules to fully
analyze Tenant versus Project-based subsidies, IRP recaptures,
Outyear HAP contract recaptures, affordability restrictions,
exception rents and an analysis of the anticipated repayability of
the partial payment of claim all in one integrated proforma.
The number of parties/stakeholders to a single transaction is
significant and includes at a minimum 26 individuals for each
single transaction including at least four to five individuals at
OMHAR, two to three at HUD and numerous others including Owners,
Property Managers, Tenants, OTAG's, PCA Consultants and Appraisers,
and at least four different sets of Attorneys and Title Company
personnel.
There are four different and distinct closing scenarios the
most common of which is a 223(a)(7). A single transaction of this
type involves 55 distinct documents with 8 signatories and 14
distribution parties.
However over the last 24 months, all of these bases have been
effectively covered and the long awaited momentum is currently being
achieved. By way of demonstrating this please note that the average
time between acceptance and close date for a standard Full Debt
Restructuring for this PAE has changed from 15 months for assets
assigned prior to January 2001 to 7 months for assets assigned after
January 2001 representing a 114 percent improvement in program
implementation with time as the measure.
Savings to Date Generated By This Program for the Federal Government
Based on Ontra's portfolio the savings to date are provided for the
written record below but in the interest of time is summarized as
follows. A total of 119 transactions have resulted in approximately
$106.3 million of which $63.8 million represents 79 completed Lites and
$42.5 million represents the 40 closed and completed Fulls.
----------------------------------------------------------------------------------------------------------------
Transaction Type No. Completed/Closed 20 Year NPV Savings
----------------------------------------------------------------------------------------------------------------
Debt Restructures Closed............. 31 $ 32,473,466
Debt Restructures Completed.......... 9 $ 9,976,894
Rent Restructures Completed (Includes 79 $ 63,800,205
Fulls to Lites and Closed Lites).
Totals......................... 119 $106,250,545
----------------------------------------------------------------------------------------------------------------
The Physical Condition of the Housing Stock Being Preserved
One of the key benefits of this program is that it ensures that the
assets are now being upgraded systematically. In order to put this into
perspective, Please Note:
Deferred Maintenance/Prerestructure Status
The program calls for the escrowing of funds to cure the
``immediate repairs'' within 12 months after closing. These repairs are
what the industry traditionally
considers deferred maintenance. The Rehab Escrow Repair numbers for
Ontra's 31
closings and 21 eminently pending (next 30-45 days) are as follows:
----------------------------------------------------------------------------------------------------------------
Deferred Maintenance
Total Rehab Escrow No. Projects No. Units -------------------------
Per Project Per Unit
----------------------------------------------------------------------------------------------------------------
$5,294,790 52 4,683 $101,823 $1,131
----------------------------------------------------------------------------------------------------------------
We have found however that there is some skewing in these numbers
with five inner-city projects representing just over $3 million (60
percent) of the deferred maintenance. Therefore, it appears that the
deferred maintenance is not a major issue at least in this PAE's
portfolio.
Long-Term Preservation of the Quality of the Housing Stock
For this same set of 52 assets--closed and pending--the program has
allowed for set-asides of approximately $57.5 million ($57,488,155)
averaging just over $12,000 ($12,276) per unit to cover the 20 year
long-term capital needs of these projects. This represents an average
of $614 per unit per year being set aside for replacements.
One of the more compelling statistics from this PAE's closed and
pending portfolio is that the average reserve deposit/unit/year was
$309 prerestructure and $439 post-restructure representing a 42 percent
increase in annual reserve deposits to the
replacement reserve accounts. These numbers seem to point to the fact
that this
program is providing a unique opportunity to reconfigure the economics
and provide for the stabilization if not the rejuvenation of aged
housing stock and thereby ensure quality affordable housing into the
future.
The Operations of the Office of MultiFamily
Housing Restructuring Assistance
In summary, this entire testimony speaks to the fact that the
program is very complex by nature, that there is definite, significant
momentum at the current time, that the program is providing solid
savings while at the same time capitalizing on a unique opportunity to
``set the economics straight'' for the Nation's FHA insured Section 8
housing stock and to ensure continuance, at least in this sector, of
quality affordable housing.
OMHAR has been integral in this process and despite the criticisms
of the program and OMHAR's implementation of such it is my company's
opinion that OMHAR has done an admirable job of juggling the priorities
of the numerous stakeholders and parties to the transactions while at
the same time developing well proportioned tools to manage the delivery
of a very complex program.
Other Issues of Interest/Concern/Potential Improvements
Based on the February 2001 survey of the private PAE's the
following opinions are offered for additional consideration by the
Subcommittee.
Advantages/Disadvantages of a Transfer of the
Current OMHAR Functions to HUD
1. It was a consensus of the Private PAE's that a transfer of
responsibilities to HUD would be a duplication of effort and
would entail an enormous loss of momentum, as new personnel
attempt to get familiar with the overall program as well as
with the status of individual assets.
2. Having the time and ability to apply a robust focus on
program results is considered critical by all private PAE's. It
was felt that OMHAR with its singular focus is well suited to
bring the program to final fruition. It was hoped that at least
some consistency in personnel can be maintained.
Program Prescriptiveness
We are aware that OMHAR has received significant criticism
regarding the OPG, the Model and other policy and procedure vehicles
that they have provided to the PAE's. From our (Ontra's) perspective
given the complexity of the statute, the ex-
tensive program requirements and the complex nature of the issues
involved, the
tools provided by OMHAR were an absolute necessity. It occurs to us
that if the
Federal Government wants to ensure consistent and fair treatment of all
the stakeholders, reliable underwriting to ensure that all owners are
treated fairly and
consistently, and that the result achieved is a fully accountable
application of the
statute, then the tools provided by OMHAR, in our opinion, have been
well proportioned to the task.
Private PAE Compensation
This topic was of major concern among the private PAE's. Although
the program was competitively bid, the PAE's did not have the same
insight into the intricacies of the program that they now have. The
program has not only turned out to be much more involved than
originally estimated but also as issues arose during the development of
the program over the last 24 months the scope of work expanded quite
substantially. OMHAR is currently in the process of considering our
concerns and we hope to see a solution soon. We have but one request
that whatever incentive compensation changes ensue that they be applied
for all assets currently undergoing active restructure or at least make
the changes effective as of January of 2001 for any assets not yet
closed.
I would like to close by respectfully thanking the Committee for
the opportunity to present these views. Thank you.
----------
PREPARED STATEMENT OF GERALDINE THOMAS
Vice President
National Alliance of HUD Tenants
June 19, 2001
On behalf of the National Alliance of HUD Tenants, we are pleased
to submit these comments on the implementation of the MultiFamily
Assisted Housing Reform and Affordability Act of 1997 (MAHRA). While
MAHRA actually encompasses a broader range of Section 8 contract
renewal options and programs, we understand that the Subcommittee today
is gathering testimony on the implementation of the Mark (Down) to
Market Program (M2M) by the Office of MultiFamily Housing Restructuring
Assistance (OMHAR) created under the statute. Accordingly, our comments
here are limited to our experience with the Mark Down to Market Program
in MAHRA.
Founded in 1991, the National Alliance of HUD Tenants (NAHT) is the
Nation's first and only membership organization representing the 2.1
million families who live in privately-owned, HUD-assisted housing,
including the tens of thousands of families who may be affected by the
Mark-to-Market Program. Our membership today includes voting member
tenant groups and 45 area-wide tenant coalitions or organizing projects
in 30 States and the District of Columbia. We are governed by an all-
tenant Board of Directors elected by member organizations from all 10
of HUD's administrative regions at our annual June Conference. I have
served as a NAHT Board Vice President since 1998, and currently Chair
NAHT's Mark-to-Market Task Force. I also serve as the President of the
Philadelphia Regional Alliance of HUD Tenants (PRAHT), which organizes
tenants in the Philadelphia area, and thus have direct experience in
organizing tenants in the M2M Program.
One of the most important features of MAHRA, sought by NAHT in our
testimony before the Subcommittee in 1997, was the Congressional
mandate for HUD to encourage tenant participation in the M2M Program
and the provision of funds to help accomplish this goal. In response,
HUD created the Outreach and Training Grant (OTAG) program to help
tenants get involved in the program. Since 1999, NAHT has convened a
monthly Mark-to-Market Task Force consisting of the area-wide tenant
coalitions or organizing projects among NAHT's membership working in
M2M buildings, including those which have received OTAG Grants from
HUD.
The comments we submit today reflect the consensus views of these
NAHT affiliated groups, based on their extensive experience with the
implementation of the M2M Program ``on the ground'' in more than 20
States, including those such as Ohio, Pennsylvania, Illinois, Florida
and New York with a large number of M2M-eligible buildings.
Summary Comments on M2M Implementation
There appears to be an emerging consensus that although the M2M
Program was slow in getting off the ground, owner participation and
OMHAR performance have finally reached a reasonable stride within the
past year. Nonetheless, some observations are in order based on the
experience of NAHT affiliates in the field which should be taken into
account in future action by Congress.
Many owners have avoided M2M. First, many owners with high project-
based Section 8 contract rents have avoided going into full M2M
restructuring than was hoped by Congress or HUD when the program was
crafted in 1997. In high market areas such as Boston, Manhattan or the
West Coast, owners with Section 8 contract rents well above 120 percent
of the FMR, which were originally thought to be prime candidates for
M2M, have found they could achieve higher rent yields by switching over
to HUD's Mark UP to Market initiative--actually increasing HUD's
Section 8 outlays--or opting-out of the Section 8 program entirely.
Tenants, HUD and elected officials have universally supported Marking
Up these contracts as a preferred alternative to opt-outs, which both
lose precious affordable housing units and initially cost HUD more
through mandatory Enhanced Vouchers at full market rent levels.
In many more markets, owners thought to be eligible for M2M
restructuring have opted instead for HUD's OMHAR Lites alternative--a
much higher proportion than anticipated by OMHAR at the start of the
program. These owners are willing to absorb a marginal cut in Section 8
subsidies to estimated ``market'' levels typically in exchange for a 1
year contract extension, in effect keeping their options open in the
event future market conditions make opt-outs or Mark UP to Market a
viable alternative. The fact that many owners have easily made the
OMHAR Lite market adjustment suggests that many project-based Section 8
contracts may well have been inflated beyond actual costs by years of
generous Annual Adjustment Factor (AAF) increases before MAHRA. These
OMHAR Lite renewals leave both the tenants and the housing stock at
continued risk of future opt-out decisions by owners.
So it appears that fewer owners than anticipated have chosen the
full M2M
restructuring path. Generally, buildings going into M2M are located in
relatively
depressed market areas with few prospects for an economic upturn in the
fore-
seeable future. For these buildings, however, concentrated in ``Rust
Belt'' States where real estate markets have generally lagged behind,
M2M restructuring can be a viable option.
But on the whole, the economic ``boom'' of the past several years
has meant high and rising rental market conditions for many owners, and
a corresponding reduction in the number of owners for whom M2M is an
attractive option. It has also meant that owners in ``healthier''
market areas are collectively in a stronger position to demand--and
get--ever higher Section 8 contract renewals, with few ``strings''
attached such as repair requirements or long-term affordability
agreements, from HUD and local agencies alike as the alternative to
opting-out.
Similarly, while MAHRA contemplated transfers of M2M eligible
buildings to nonprofit groups and provided for ``disqualified''
properties to be sold to nonprofits, in practice this has occurred very
rarely. The specter of owner opt-outs has dampened efforts to transfer
properties in any market area which can sustain rents; many owners
facing disqualification can simply walk away from M2M and opt-out,
defusing enforcement efforts. OMHAR has responded with a detailed and
thoughtful series of policy initiatives to promote transfers to
nonprofit buyers, within the limits provided by the statute; to date,
however, there have been few takers. NAHT and its affiliates, as well
as OMHAR Director Ira Peppercorn, have identified the lack of a capital
grant funding source for Preservation, which helped encourage such
transfers under the now-defunct Title VI Preservation Program, as one
of the reasons for the paucity of nonprofit purchase offers under M2M.
Fundamental to the lack of owner participation in M2M, however, was
the decision by Congress to make owner participation in M2M entirely
voluntary. Unlike the Title VI Preservation Program, which required
owners to participate in a regulatory framework which preserved
affordable housing while guaranteeing owners full market value, MAHRA
allowed owners to decide whether to participate in M2M or ``opt-out''
of Section 8 completely. As amended in 1999, owners can now also
participate in Mark UP to Market, but participation is still voluntary.
As long as Congress is unwilling to require owner participation in
Section 8 renewals and/or regulate rents for assisted housing, owners
will continue to opt-out of the program and/or negotiate ever higher
levels of Section 8 renewals from HUD, with few repairs, as the price
of staying in the program. And fewer owners will choose to restructure
under M2M. The result will be continued erosion of the affordable
housing stock and missed opportunities for savings in the Section 8
program.
``Devolution'' of decisions to PAE's has slowed program
implementation and added to complexity and costs. Another reason for
the late start of the M2M Program appears to be administrative. The
Congressional choice to ``devolve'' administration to State or private
``Participating Administrative Entities'' (PAE's) added a hugely
complicated layer to the program. It took a long time for OMHAR to
negotiate complicated administrative and fee agreements with an ever-
shifting cast of PAE's
to implement the program. Data from HUD's recent extension of the
``devolution''
concept to Section 8 Contract Administration suggests that
``contracting out'' HUD
functions to State or private entities adds additional costs, as well
as delays, to
delegated programs.
Interestingly, as OMHAR has attempted to implement the PAE's
mandate, OMHAR has been compelled to transform its approach once the
M2M Program hit the ground. For example, it turned out that many of the
public agency PAE's which Congress assumed would carry out the program
in fact were not that interested. As a result, OMHAR has found itself
dealing with fewer public agency PAE's in the past 2 years and has
ended up delegating to a small number of ``private'' PAE's handling a
large number of States each. Because of complaints from the field by
tenants and others about the performance of many private PAE's, OMHAR
has also increased its oversight over these agencies. So although
Congress intended M2M to be administered by State and private entities,
``real world'' conditions have required a ``recentralization'' of the
program back to HUD, with a small number of PAE's operating across
State lines.
Another trend has been OMHAR's creation of its ``Large Owner
Initiative,'' whereby OMHAR Headquarters handles a large number of
transactions for large national owners such as AIMCO, in recognition of
the fact that ownership of HUD housing is increasingly concentrated
among a small number of national and regional firms. Perhaps half of
the HUD Section 8 stock is owned by fewer than 20 ownership entities;
these owners found it inconvenient and costly to deal with a myriad set
of local agencies and themselves have preferred to deal with one
central administrator: HUD.
NAHT believes that these evolutionary trends in administration of
M2M point both to legislative adjustments in M2M, as well as provide
lessons applicable to other initiatives, such as Contract
Administration of Section 8 by State Housing Finance Agencies.
Jury still out on final results of restructuring. Because of
program delays, few M2M Restructuring Plans have reached the
``closing'' stage. As a result, NAHT and its affiliates have few cases
to report where organized tenant groups have participated and been
heard in the final MRRAS Plan which accompanies restructuring.
Accordingly, we offer no evaluation or comments on how effective M2M
has been from the point of view of substantive repairs and management
improvements sought by residents.
One area worth noting, however, where Congressional and tenant
concerns may have been satisfied to date is in the apparently minimal
extent of ``voucherization'' of family developments in the M2M
restructuring process. Reflecting a compromise between Congress and the
Clinton Administration, MAHRA allowed PAE's to ``voucherize'' family
developments in high vacancy rate areas as part of a final
restructuring plan, provided several determinations were made by the
PAE. (The
Clinton Administration attempted to negotiate a broader mandate for
voucher-
ization; the Senate, backed by NAHT and other constituency groups,
advocated for maximal renewal of project-based subsidies.)
To date, NAHT is aware of only one instance of ``voucherization''
in the country under the full restructuring program, although 13 OMHAR
Lite properties have been ``voucherized.'' However, OMHAR's summary
reports of the M2M pipeline do not indicate which, if any, properties
have been converted to vouchers, or how many voucher conversions are
under consideration by PAE's. Hopefully, most PAE's have concluded that
project-based renewals are either mandated or warranted in the
buildings they have reviewed up to the draft MRRAS Plan stage. While
Congressional design of MAHRA appears to have avoided large-scale
voucherization, it would be advisable for Congress to use this
opportunity to reaffirm and strengthen HUD and OMHAR's mandate to
maximally preserve M2M buildings with project-based Section 8
assistance wherever possible.
Progress has been made toward tenant participation, but more can be
done. MAHRA mandated HUD to provide for tenant participation in the
program. NAHT and its affiliates were active advocates throughout the
M2M rulemaking process to ensure that this goal was reflected in M2M
Program regulations.
OMHAR deserves much credit for establishing a formal tenant
participation process in the final M2M regulations including two
required meetings with residents in M2M properties; for mandating that
tenants and their associations be granted third-party beneficiary
status in the Use Agreements accompanying MRRAS Plans in
restructured properties; for publishing an Operating Procedures Guide
which guar-
antees residents' right to participate in the program; and, despite
some delays, for
designing and funding a workable system of technical assistance
programs (OTAG's, ITAG's, and VISTA Volunteers). OMHAR's administration
of the $10 million annual set-aside for technical assistance provided
in Section 514 of MAHRA has resulted in an OTAG-funded support
structure for tenant participation in about 30 States, including most
of those with large M2M portfolios. OMHAR has been effective in
selecting appropriate local partners to carry out tenant technical
assistance work in the field--itself no small achievement. As the M2M
Program reaches its full stride, this technical assistance
infrastructure is well-positioned to serve the tenants affected by M2M
in most of the country.
OMHAR has also been responsive to complaints from NAHT affiliates
and OTAG grantees in the field that PAE's--particularly the private
PAE's--were failing to meet OMHAR's requirements for tenant
participation. In July 2000, NAHT's M2M Task Force collected complaints
from OTAG's across the country regarding private PAE's failure to
follow tenant participation requirements, such as notice to residents
for required tenant meetings. The problem grew in magnitude as a small
number of private PAE's took increasing numbers of States in their
service areas. Following a teleconference call with OMHAR Director Ira
Peppercorn in April 2001, which detailed these problems, OMHAR has been
able to secure a marked improvement in the performance of several of
the private PAE's. OMHAR has also responded to NAHT's suggestion for a
face-to-face conference among OTAG's and PAE's to work out tenant
participation protocols in greater detail.
Still, more can be done. The 10 day comment period on MRRAS Plans
provided by OMHAR is not enough; at least 30 days is needed for tenants
and their advisers to comment meaningfully. Requirements to provide
notice and mandatory meetings with tenants should be extended to OMHAR
Lite buildings and to decisions to ``disqualify'' an owner or otherwise
to change the status of a property. OMHAR policies still deny access to
tenants to basic information about the project's operating budget,
essential information to help tenants comment meaningfully on the
property's management plan. And there remain major gaps in HUD
enforcement of the Con-
gressional mandate to provide One Year Notice to Tenants when owners
decide to opt-out of Section 8--originally required in MAHRA--and to
enforce the owners' Duty to Accept Enhanced Vouchers when owners opt-
out. Recommendations to improve these and other aspects of tenant
participation are provided below.
Recommendations for Legislative Improvements to the M2M Program
Based on discussion of NAHT's M2M Task Force and input from NAHT
affiliates and OTAG providers across the Nation, we recommend the
following action by Congress to extend and improve the M2M Program this
year.
(1) Extend M2M restructuring authority. NAHT joins the emerging
consensus that the authority to restructure mortgages to save costs, as
outlined in MAHRA, should be extended indefinitely.
(2) Continue OMHAR as a separate office, reporting to the
Secretary. After a slow start, OMHAR is now functioning smoothly and
generating results at a steady pace for the Department, given the
limitations of the program designed by Congress and the reluctance of
owners to voluntarily participate in a ``boom'' real estate market. To
throw sand in the machinery at this time, or spark inevitable personnel
upheavals and administrative confusion that would ensue by a radical
restructuring of the program would be both unnecessary and unwise.
OMHAR is not broke; we do not need to ``fix'' it.
NAHT's M2M Task Force wrestled with the question of whether OMHAR
should be folded back into the Office of Housing. Generally, NAHT has
favored rebuilding, not dismantling, HUD's Office of MultiFamily
Housing over the years. We have generally been opposed to the
``devolution'' of HUD functions to the States, and to the deregulation
and voucherization of HUD housing stock which some have linked to the
devolution strategy. Likewise, we are generally opposed to
``contracting out'' HUD functions such as contract renewal decisions
for Section 8--a process strikingly similar, and perhaps modeled on,
the delegation of M2M decisionmaking to PAE's.
Just last week, NAHT testified before the Commercial Activities
Panel created by Congress and opposed the $196 million cost of Section
8 Contract Administration (C/A) to State Housing Finance Agencies.
Instead, we pointed out that for a little over half of this amount, HUD
could hire 1,000 new MultiFamily Housing Staff--double current staffing
levels--for $115 million, more than enough to do the same work in-
house.
At the same time, we must recognize that the Office of Housing has
been seriously understaffed for many years. The forced retirements,
layoffs and ``reinvention'' of the past few years have decimated the
HUD Headquarters MultiFamily Staff and Field Offices alike. Many of the
Department's most experienced personnel, and most of its
``institutional memory'' in the MultiFamily Housing field, are gone
from the Agency. To compound this problem, most of the remaining HUD
bureaucracy is eligible for retirement in the next 2 years.
So while rebuilding HUD's Office of MultiFamily Housing (OMFH) is a
desirable goal, we must recognize it cannot happen overnight.
Accordingly, we recommend that Congress begin the long-term project of
rebuilding HUD by phasing out the
C/A system and folding these functions back into the OMFH; repealing
the $196
million line outlay expense for Contract Administration; adding $115
million to
HUD's Salaries and Expense Account; and targeting these funds to hire
and train
new 1,000 MultiFamily Staff over the next few years. (Actually, up to
1,750 new
staff will have to be hired and trained, including replacements for
existing staff who
may retire.)
In the meantime, and until this happens, it would be irresponsible
to turn over administration of the M2M Program now to OMFH until it is
restaffed and trained to handle the job. We fully support moving in
this direction, and beginning this process now. But given the magnitude
of the personnel challenge and pending upheavals facing OMFH, Congress
should leave the successful M2M Program in the separate office where it
is located now, reporting to the Secretary, for at least the next few
years.
(3) Redefine OMHAR's governmental mission and transform PAE's into
subcontractors for HUD. The lessons of the PAE's experiment in M2M
underscore NAHT's conclusion that devolution of HUD functions to State
and private entities is a bad idea. Besides being inherently more
costly, from the tenants' point of view contracting out is also
undesirable because it adds to the administrative complexity and
confusion of having to deal with several agencies rather than one.
Moreover, NAHT's experience with the private PAE's in particular
suggests it is difficult to educate the private sector on the value and
role of tenant and ``customer'' participation in decisions which affect
them.
As noted above, the implementation of M2M has been evolving in a
direction of greater administrative oversight by OMHAR of a shrinking
number of PAE's, who have been acting more and more as subcontractors
to OMHAR rather than independent entities acting in OMHAR's stead. NAHT
believes that Congress should recognize and further promote this
evolution in legislation this year. Specifically, we recommend that
Congress define the minimum governmental functions of the M2M Program--
preparation and approval of the final MRRAS Plan and review of public
and tenant comments at different stages of the process--and relegate
them to OMHAR.
Congress should also specify that PAE's--especially private PAE's--
should not be delegated these fundamentally governmental functions.
OMHAR may choose, and should be allowed, to subcontract out specific
functions ancillary to preparing the Plan--such as preparation of a
Capital Needs Assessment, appraisal, underwriting or environmental
testing--to outside contractors, in cases where in-house staff cannot
perform them. These outside contractors may be private PAE's or others.
But the essential governmental function--decisions regarding the MRRAS
Plan and subsidy commitments which go with it--should not be
``privatized.''
(4) Encourage tenant participation. NAHT offers several
recommendations to further improve tenant participation in the M2M
process.
(a) Improve access to information. Congress should mandate that HUD
release the Operating Statement of Profit and Loss (formerly Form
92410) to tenant groups which request it, as part of their review of
operating expenses and preparation of a Management Plan under the M2M
process (or other processes under MAHRA). As residents of the
properties, tenants have the greatest stake in knowing how their rent
money--and subsidy dollars--are being spent. Residents also know a
great deal about what is going on in their building, and can help act
as HUD's ``Eyes and Ears'' to ensure that funds are spent properly.
Similarly, Congress should mandate release of the balances in Reserve
for Replacement Accounts for M2M properties. With access to these
documents, residents can help identify scams, waste, and double-
dipping, can help OMHAR and PAE's more accurately assess repair and
operating needs, and can help identify potential nonprofit transfer
opportunities. Congress should likewise mandate that HUD release the
prospective operating budget of M2M properties prepared under the MRRAS
plan. Although OMHAR has promised the release of this document, few
PAE's have in fact done so, even when requested by local tenant groups.
OMHAR has acknowledged that there is no legal barrier to releasing
these data under the Freedom of Information Act, despite earlier claims
to this effect. Instead, OMHAR has declined to restore HUD's earlier
policy releasing this document due to a fear of owner opposition. But
honest owners should not fear release of this information to residents,
if they have nothing to hide. Congressional intervention is needed to
ensure release of this document to residents.
Similarly, Congress should mandate the release of HUD's Previous
Participation Form 2530--redacted to remove Social Security or EIN
numbers--to resident groups upon request, so that tenants learn what
other properties are owned or managed by the principals who control
their building. With this information, tenants can research or contact
tenants in other buildings to explore common issues or problems.
(b) Extend the $10 million set-aside for technical assistance
funding. Section 514 of MAHRA, which authorizes HUD to provide up to
$10 million annually from the $14 billion Section 8 Certificate Fund
for technical assistance to tenants in expiring Section 8 buildings
(NOT just those eligible for M2M) ``sunsets'' on September 30, 2001. As
mentioned above, OMHAR has done a good job in designing programs to
make good use of these funds. However, existing programs remain
underfunded. Extending this authority will provide sufficient funds to
continue existing commitments and meet reasonable demand for funds in
the future.
At the same time, Congress should fix an unusual, unintended glitch
in the wording of Section 514 which has been interpreted by HUD's
Office of General Counsel to prohibit its ``rollover'' of unexpended
annual balances into the next fiscal year, as is the case with most HUD
programs. As a result, OMHAR discovered that funds authorized by
Congress in prior fiscal years which had not been ``obligated'' during
that fiscal year were ``lost'' at the end of that year, and were thus
not available to meet program commitments. Of the $40 million
authorized by Congress from fiscal year 1997 through fiscal year 2001,
only about $12 million has been actually obligated financially to HUD
grant programs to date--another $8 million is in the pipeline. The
rest--some $20 million--has reverted to the Certificate Fund and may no
longer be available. In extending Section 514, we recommend that this
glitch be fixed to allow the rollover of unobligated funds to
successive fiscal years.
We also recommend that Congress clarify that Section 514 funds can
be used to assist tenants in Section 202 and 515 buildings, and
buildings receiving Enhanced Vouchers--for example, Section 8 opt-out
and/or mortgage prepayment buildings--and other voucher conversions
from project-based Section--for example, HUD Property Disposition/
foreclosure buildings--from the Certificate Fund as well. NAHT
affiliates have reported requests from tenants in these buildings for
assistance,
but are unable to use OTAG or ITAG funds to assist them under current
eligibility
definitions.
(c) Extend time for review of the MRRAS Plan. We recommend that the
required time for review be extended from the current 10 to 30 days for
tenant review and comments, on the draft MRRAS Plan.
(d) Require written response to tenant comments. We recommend that
OMHAR and/or the PAE reviewing tenant comments respond, in writing, to
these comments, stating reasons for concurrence or nonconcurrence, as
is required in Federal Environmental Reviews.
(e) Require notice to tenants and a required meeting throughout the
M2M process. Most important, tenant notice and at least one mandatory
meeting should be required of all OMHAR Lite projects. The unexpectedly
high volume of OMHAR Lites dramatically underscores the need for a
guaranteed tenant role in this process. In particular, tenants have a
stake in ensuring that reductions in project income in a Lite building
do not adversely affect project operations, repairs or reserves.
Similarly, notice to tenants and a guaranteed meeting should be
required at the end of the M2M process if a property is being
disqualified or kicked out of the program, or if an owner changes its
decision and changes to OMHAR Lites, Mark Up to Market, or opts-out of
the program--any change in property status. Tenants should also be
notified if the PAE handling their property changes in mid-stream.
(f) Enforce Notice and Duty to Accept requirements when owners opt-
out and fix problems with Enhanced Vouchers. When owners opt-out, HUD
should affirmatively enforce its own standards. While this should be
obvious, unfortunately HUD has stated publicly and in writing that it
does not intend to enforce an owner's duty to accept Enhanced Vouchers
in the event of an opt-out, even though HUD's Section 8 Guide clearly
states that owners are so obligated. Likewise, HUD has not always
required owners to adhere to the One Year Notice of Opt-Out to tenants.
Congress should clearly mandate HUD to enforce its own standards.
Congress should use the opportunity when it extends M2M to further
amend those sections of MAHRA that provide Enhanced Vouchers in the
event of opt-outs. Briefly, problems requiring a legislative fix this
year, where HUD does not believe it has a mandate, include eliminating
PHA rescreening of tenants when they switch to Enhanced Vouchers, and
allowing ``empty nester'' Section 236 tenants to keep an overhoused
apartment, provided they pay ``market'' or FMR rent.
(5) Support the Preservation Matching Grant bill to provide a
capital grant source to promote nonprofit transfers and preservation of
M2M buildings. As indicated above, OMHAR's restructuring ``toolbox''
does not today include a Capital Grant source to help potential
nonprofit purchasers assemble the resources to buy and preserve
buildings undergoing the M2M process. For properties needing repairs, a
Capital Grant source would be a useful tool to help an owner fix a
substandard building as part of a MRRAS Plan.
At a recent forum convened by the Government Accounting Office,
OMHAR Director Ira Peppercorn concurred with NAHT and other
participants that passage of a Capital Grant program by Congress would
be a welcome additional tool to help OMHAR in its preservation mission.
Fortunately, prospects have improved for passage of the Preservation
Matching Grant bill which passed the House in the last session but did
not get out of this Subcommittee in the Senate. With strong bi-
partisan support in both Houses, we are hopeful that the Preservation
Matching
Grant will pass in this session. The bill has been refiled in the House
as H.R. 425, and is soon to be refiled in the Senate by Senator
Jeffords and others. We strongly urge the Subcommittee to hold an early
hearing to give this bill renewed momentum when it is refiled.
(6) Adopt Regulatory Program to Preserve Affordable Housing. In
extending the M2M Program, NAHT believes that Congress should establish
a national regulatory framework to limit owners' ability to opt-out,
prepay, and obtain windfall profits through high market rents at the
expense of residents and the Nation's investment in affordable housing.
It would be far preferable and less costly to preserve at-risk units by
regulating owner ``choice'' to opt-out of HUD programs.
Congress has the authority to extend regulation or to require
owners to seek and accept Congressional offers of additional Section 8
subsidies in order to achieve the overriding public purposes of
preventing tenant displacement and preserving housing at the least cost
to the Government. For example, restoring the regulatory framework of
the Title VI Preservation Program and extending its concepts to ex-
piring Section 8 contracts would preserve more units and would be
cheaper in the
long run than replacing lost units with new construction. NAHT would
prefer this
approach.
Creation of a regulatory framework would result in a dramatic
upsurge of owners seeking full M2M restructuring at lower Section 8
rent levels, fewer OMHAR Lites and ``opt-outs,'' and greatly increased
cost savings in the Federal Section 8 Cer-
tificate Fund as a result. It would also greatly increase OMHAR's
leverage in
negotiating higher repair and operating standards and longer-term
affordability
in exchange for the financial benefits of restructuring than is the
case in an un-
regulated environment where owners can walk away from the process at
any time.
It would also result in a dramatic increase in owners willing to sell
to nonprofit
organizations.
In the meantime, at the Federal level, both Congress and the
Administration have now acknowledged the need to provide funds as
incentives to persuade owners voluntarily to remain in HUD's subsidy
programs. As the experience under MAHRA shows, these solutions will be
more expensive in the absence of a Federal regulatory framework, and
many units will still be lost. However, voluntary financial incentives
remain less expensive than the cost of doing nothing, which would leave
society a huge unpaid bill for new replacement housing and fuel the
hidden costs of homelessness and despair. So Congress should extend the
M2M Program, supplemented by Preservation Matching Grants, even in the
absence of a regulatory framework to preserve housing at the least cost
to the Government.
(7) Reaffirm and strengthen HUD and OMHAR's mandate to preserve M2M
buildings with project-based Section 8 assistance. As indicated above,
while the current program design appears to have resulted in a minimal
number of voucher conversions, the relatively small number of completed
``closings''--129 out of 904 properties accepted for M2M assignment as
of June 11, 2001--suggests that caution on this point may be warranted
before concluding that massive voucherization has been avoided.
Congress should use this opportunity to clarify its intent to preserve
the maximum amount of the M2M-eligible stock with project-based Section
8 assistance.
Mr. Chairman, thank you for the opportunity to provide testimony to
the Subcommittee today. NAHT stands ready to work with the Subcommittee
and with OMHAR to make the M2M Program work better for tenants and our
communities.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR ALLARD
FROM JOHN C. WEICHER
Q.1. What is going to happen to the properties that require
full mortgage restructuring but only received rent reductions?
What can HUD do to ensure their physical and financial health?
Would it be accurate to say that some of those owners are
receiving Government subsidies but neglecting to keep up their
properties? And, if so, what actions has HUD taken against
these owners?
A.1. There are approximately 200 properties that are identified
as requiring full mortgage restructuring but that only received
rent reductions. These properties have been placed on a ``watch
list'' and will be closely monitored by our field offices to
assure that the owners meet their responsibilities for property
maintenance and financial soundness.
Through HUD's Real Estate Assessment Center, these
properties will be inspected and analyzed for any trend to
deterioration or financial compliance issues. We fully intend
to protect tenants in these properties from living in housing
that is less than fully acceptable and will take appropriate
servicing measures against any owners who do not maintain their
properties, including referral to the Departmental Enforcement
Center.
Q.2. The same Act that established the Mark-to-Market Program
gave HUD the authority to issue grants for the capital costs of
rehabilitation to owners of eligible mark-to-market properties.
The grants are to be funded with money recaptured from
contracts for interest reduction payments. Though HUD has not
yet exercised this authority, HUD's 2001 and 2002 budgets
contain fund balances from these recaptured payments.
How much money is available from recaptured interest
reduction payments for rehabilitation grants? How has this
money been used since the enactment of MAHRA? What are HUD's
plans for this money? Does HUD plan to exercise its authority
to issue rehabilitation grants?
A.2. To date, OMHAR had $22,521,724 in available interest
reduction payments (IRP's) from properties going through its
debt restructuring process, and has used its authority under
MAHRA to apply the funds as follows:
$19,570,724 was used to fund the Reserve-for-
Replacement accounts of the properties from which the IRP
was ``recaptured.''
$1,954,000 was used to subsidize the debt service on
the property.
The remaining $997,000 was actually recaptured and
returned to HUD.
For the rest of the Department, the fiscal year 2002 budget
proposes to amend the multifamily rehabilitation program
authority under Section 236(s) by repealing provisions which
were designed to offer loans to owners to rehabilitate
multifamily projects due to the outlay costs of implementing
this authority.
HUD currently has the authority to provide grants under
Section 236(s) to owners for these purposes, although that
authority has yet to be implemented for several reasons. First,
the authority deals with highly complex financial issues.
Second, it had been HUD's intention under the previous
Administration to implement the grant authority simultaneous
with the implementation of the loan authority, which was not
enacted until more recently. As a result, implementation of the
grant authority has not yet taken place.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES
FROM JOHN C. WEICHER
Q.1. One concern that I have heard voiced is that a number of
properties with above-market rents are not being referred by
FHA to OMHAR. Do the panelists agree with that assessment? If
so, what is the best way of addressing that problem? For
example, should OMHAR be given the function of doing the
initial reviews of rents?
A.1. There have been instances of properties with above-market
rents not being referred to OMHAR. Where this has happened we
in FHA have worked with the offices to review the reasons why.
We often found that rents that appeared to be above-market
were actually at the market when reviewed under our rent
comparability requirements. Many of the markets have
substantially strengthened in recent months, so that rents in
those markets have risen to the level of the project rents.
There are also properties where the rents in the immediate
neighborhood are different than the rents for the Zip Code as a
whole. The model used for initially determining whether a
property was above market used Zip Code information. And,
property rents vary by property condition.
Some types of properties may not have been referred because
the initial guidance was unclear. For instance, the initial
guidance on Section 8 renewals for FHA insured, State bond
financed properties initially seemed to exempt such properties
(this has been corrected in subsequent guidance).
There are other reasons why a property may not be referred
to OMHAR. We recently surveyed the field on a sample of 13
properties that OMHAR reviewed for rent comparability and had
contract rents above market. All except one was not sent to
OMHAR for debt restructuring for legitimate reasons unrelated
to rent levels; these reasons ranged from owner ineligibility
to prepayment. The one exception was based on a
miscommunication where the local office thought they had sent
it for restructuring; OMHAR had treated as only a request for
rent comparability. (This property has been subsequently
returned to OMHAR for restructuring.)
We are reviewing all of the properties with Section 8
renewals since October 1, 2000, that OMHAR's model indicates
should have been submitted to them for rent or debt
restructuring. Any properties with contract rents still above
market will be identified for special review and, if necessary,
steps taken to bring the rents in line at the earliest
opportunity.
Looking ahead, I think it is now clear to all of our owners
that Congress fully intends to continue the requirement to
bring properties to market rent if they are going to continue
to receive Section 8 subsidies. At the same time, OMHAR has
improved its track record for processing its deals and holding
its PAE's accountable for timely processing. Both factors
should result in all eligible properties receiving the
assistance they need through OMHAR.
OMHAR is already able to provide rent comparability studies
and analysis where needed. We believe, for the reasons cited
above, that the process would continue to work and to improve,
without additional Congressional requirements.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES
FROM PETER GUERRERO
Q.1. Some participants in the program have complained that
OMHAR's operating procedures guide is far too detailed and
prescriptive, and the controls it has put in place are too
onerous and time consuming. Do you agree? Does the guide give
the PAE's enough flexibility to deal with the specifics of
individual deals?
A.1. Of the 15 participating administrative entities we
contacted, including 10 public and 5 nonpublic entities, 7
believed the extensive requirements contained in the operating
procedures guide has been a hindrance to completing the
restructurings in a timely manner. For example, one public
participating administrative entity told us the guide is
tedious and time consuming to follow and becomes a source of
frustration when the entity is trying to solve problems by
thinking creatively. However, the Participating Administrative
Entities provided few specific examples of overly prescriptive
requirements that contributed to delays. As a result of
concerns with the operating procedures guide, OMHAR streamlined
its requirements and reissued the guide in January 2001. OMHAR
believes the revised guide makes clear its reliance on good
judgment and quality restructuring by the Participating
Administrative Entity and notes OMHAR's willingness to consider
alternative approaches that reach the goals of the program.
OMHAR said the emphasis throughout the revised guide is toward
flexibility in reaching common sense conclusions and logical
restructuring outcomes.
The remaining eight Participating Administrative Entities
we contacted said the operating procedures guide was necessary
to ensure consistency in the program and did not impede their
ability to complete the restructuring transactions in a timely
manner. Furthermore, most program stakeholders participating on
our expert panel believed the guide somewhat or greatly
accelerated the processing of restructuring transactions. While
we did not conduct a thorough examination of all the
requirements contained in the operating procedures guide, we
tend to agree with the majority of Participating Administrative
Entities who believe the guide was necessary to ensure
consistency in the program. While the guide contains specific
requirements that Participating Administrative Entities must
follow in reaching decisions on various restructuring issues
affecting a property and how those decisions are to be
documented, it allows the entities to reach decisions based on
the property's specific circumstances. Accordingly, we believe
that it gives Participating Administrative Entities sufficient
flexibility to deal with the specifies of individual
restructuring transactions.
Q.2. Do the guidelines ensure consistent results across State
lines? In your view, is this a desirable goal?
A.2. The operating procedures guide outlines a uniform process
for all Participating Administrative Entities to follow in
completing a restructuring transaction, the guide helps to
ensure consistent results across State lines, which we believe
is a desirable goal. The law requires OMHAR to assign
properties for restructuring to the Participating
Administrative Entities based on the entities' geographic
jurisdictions. Consequently, Section 8 property owners with
properties in several States may be dealing with several
different entities. Without a national mark-to-market protocol
to ensure consistency, there is increased likelihood that such
owners would become frustrated trying to negotiate transactions
with the different Participating Administrative Entities, which
may be following different restructuring processes.
Q.3. Has the increased involvement of HUD in the operations and
staffing of OMHAR in the past several months had any impact on
OMHAR's ability to do its work?
A.3. According to OMHAR, the Office has been unable to obtain
new staff due to the current hiring freeze by HUD, despite the
fact that OMHAR is exempt from this policy. OMHAR also noted
that HUD has not allowed internal promotions due to budget
constraints. OMHAR stated that they need to fill vacated
positions and promote staff in order to maintain the progress
made in restructuring Section 8 properties. OMHAR noted that
the law gives them the statutory authority to hire and promote
staff as needed. Section 574(a) of the law states that the
Director of OMHAR can appoint and determine the compensation of
employees that is
necessary to carry out the functions of the Office. According
to
HUD, restrictions on hiring and promotions were the result of
OMHAR's scheduled termination on September 30, 2001. HUD stated
that hiring and promoting staff did not make sense with OMHAR
scheduled to terminate. HUD did say that the restrictions would
be lifted if OMHAR's authority is extended.
Q.4. As you know, the law gave State and local housing finance
agencies a priority in becoming restructuring agents for HUD,
or PAE's. While there are more public PAE's, the private PAE's
are doing more of the work. This is particularly true for the
more complex full restructurings. Why is this the case? How
have public and private PAE's performed to date? To what do you
attribute any differences in performance? For example, did
OMHAR simply not give public PAE's assets, or did public PAE's
get assets later than private PAE's? In addition, Barbara
Thompson testified that, on a percentage basis, public PAE's
did as well as private PAE's in terms of speed. Is this true?
A.4. Of the 138 full mortgage restructurings completed by June
15, 2001, nonpublic Participating Administrative Entities
completed 106 (77 percent) and the public entities completed
the remaining 32 (23 percent). On average, the nonpublic
Participating Administrative Entities took less time to
complete the full mortgage restructurings once they accepted
the property from OMHAR for restructuring--about 395 days
compared with an average of 475 days for the public entities.
The nonpublic Participating Administrative Entities also
completed more rent restructurings and required less time to
complete the restructurings than the public
entities. For example, of the 500 rent restructurings completed
as
of June 15, 2001, the nonpublics completed 278 (56 percent) and
required about 180 days to finish the process compared with the
public entities that completed 219 (44 percent) and required an
average of 221 days. According to OMHAR, public entities may be
less willing to put pressure on the owners to cooperate in a
timely manner, or may engage in more lengthy negotiations to
get the best deal for the owner. While both of these actions
cause delays in completing the transactions, OMHAR said public
entities may feel compelled to do so since they have
established long-term relationships with the property owners.
OMHAR also noted that nonpublic Participating Administrative
Entities seem to be more interested in earning the incentive
payments for timely completion of the restructurings than the
public entities. OMHAR believes this may be largely
attributable to the fact that the nonpublic entities receive a
significantly lower base fee than the public entities.
OMHAR has assigned more properties to the nonpublic
Participating Administrative Entities for restructuring. For
example, as of June 15, 2001, OMHAR had assigned 700 properties
requiring full mortgage restructurings to nonpublic entities
and 234 properties to public entities. For those properties
requiring only rent restructuring, OMHAR assigned 345 to
nonpublics and 243 to publics.
According to OMHAR, nonpublic Participating Administrative
Entities are assigned properties in States where there is no
public Participating Administrative Entity presence, the public
entity has been capped either by their own election or by OMHAR
due to performance, or there is a ``large-owner'' memorandum of
understanding involving multijurisdictional properties--used
for those owners with a large number of Section 8 properties
located in various States.
Q.5. In your view, do public PAE's have the staff to handle M2M
work? Do private PAE's have enough staff?
A.5. While we did not specifically evaluate the Participating
Administrative Entities' capacity to complete mark-to-market
restruc-
turings, we found that the nonpublic entities tended to have
more staff dedicated to work on the program, although they also
tended to have larger workloads. Additionally, OMHAR told us
that the skills, expertise and seniority at both a staffing and
organizational level were significantly lower for a number of
the public Participating Administrative Entities, and that the
capacity of some public entities has proven to be significantly
less than indicated in their original proposals.
Q.6. The witness from the National Association of State Housing
Agencies, Ms. Thompson, says in her testimony that OMHAR has
created many impediments to State agencies participating in the
Mark-to-Market Program. In your view, is this accurate? If so,
how have the private PAE's been able to complete so many
projects? Are there impediments unique to the public PAE's, or
are there different requirements for the public vs. private
PAE's?
A.6. We are not clear to which impediments Ms. Thompson is
referring, although we are aware that her organization has not
been pleased with the compensation that the public
Participating Ad-
ministrative Entities receive to complete the restructurings,
the
program's operating procedures guide, or some of the program's
conflict of interest provisions. However, public Participating
Administrative Entities receive higher compensation than the
non-
publics and the restructuring process, including any conflict
of interest provisions, outlined in the program's operating
procedures guide applies to both public and nonpublic entities.
According to OMHAR, there are no restructuring requirements
that are unique to the public Participating Administrative
Entities.
Q.7. The law authorized OMHAR to establish exception rents in
certain circumstances. The Congress provided this authority to
provide OMHAR with some flexibility. There were two specific
circumstances that were considered: First, inner-city
properties where local market rents were too low to support the
operation of a project that was generally considered to be an
anchor in an otherwise blighted community. The Congress clearly
expected OMHAR to provide rents to continue to maintain such
properties. Second, the Congress felt that exception rents
would be needed in rural areas. Has OMHAR been exercising this
authority? In what cases?
A.7. Section 514g(2) of the law states that exception rents are
to be allowed if a Participating Administrative Entity
determines that the housing needs of the tenants and the
community cannot be adequately addressed through implementation
of the rent limitation required through a mortgage
restructuring. The law allows Participating Administrative
Entities to provide exception rents that do not exceed 120
percent of Fair Market Rents for up to 20 percent of the
expiring Section 8 contract units in a fiscal year. The law
also allows OMHAR to grant waivers for rents that exceed 120
percent of Fair Market Rents for up to 5 percent of all units
restructured in any fiscal year. While OMHAR said they did not
have an identifier to determine whether the exception rent
properties were located in inner cities or rural areas, they
could provide the number of properties receiving exception
rents to date. Accordingly, 36 properties have received
exception rents as of July 2, 2001.
OMHAR noted that several reasons exist for properties
receiving exception rents, including: (1) when market rents
will not support the property's expenses, such as in cases
where rents are stable and expenses are increasing as may
frequently occur in rural areas or in areas marked by generally
poorer economics, low growth, or even population decline; (2)
when the housing should be retained since acceptable,
affordable options are not available which is often the case in
rural areas where the mark-to-market property may be the only
rental housing; (3) when older properties that are
characterized by increasing expenses for repair and maintenance
and the need to increase deposits to the replacement reserves--
effectively an expense--for the future have higher expenses
than other properties; and (4) when properties have higher
expenses than market rate properties because of the additional
administrative burdens of Section 8--that is, the need for
additional security and/or maintenance in stressed areas.
Q.8. One clear reason for giving State housing finance agencies
a priority in the law was that the Congress felt that public
agencies would be more aggressive about enforcing the mission
of maintaining affordable housing in strong physical and
financial condition for the full term of the 30 year
affordability commitment. From discussion with program
participants, has there been a difference in the performance of
the public and private PAE's with regards to adequate
rehabilitation, adequate reserve for replacement for future
capital needs, or other ``mission''-related indicators keeping
the long-term affordability in mind?
A.8. Since we did not include an examination of differences
between public and nonpublic Participating Administrative
Entity performance as part of our work, we are not in a
position to judge whether there have been any meaningful
differences between public and nonpublic entities' performance
of mission-related activities, such as their actions to address
property rehabilitation needs. In analyzing the dollar amounts
of rehabilitation required for the
138 completed full mortgage restructurings--as of June 15,
2001--
we found that, on average, public Participating Administrative
Entities required more rehab funds than nonpublic entities. For
example, for the restructurings completed by public entities an
average of about $106,000 per property in rehabilitation was
required, while the nonpublic entities required an average of
about $53,000 per property in rehabilitation for the
restructur-
ings they completed. We also found that for 44 percent of the
properties restructured by nonpublic entities, no
rehabilitation was required, compared to 13 percent of the
properties restructured by public entities.
Q.9. As a follow-up, is there some general and consistent
standard of rehabilitation and replacement reserves that can be
incorporated into the statute or the regulations that ensures
that building will continue in good shape for the 30 years?
A.9. None of the members of our expert panel or other program
stakeholders that we met with specifically suggested that there
needs to be a revision of the legislative or regulatory
standards
regarding property rehabilitation. Requirements in the Mark-to-
Market legislation and regulations and in OMHAR's operating
procedures guide make it clear that properties are not only to
receive necessary rehabilitation when the property goes through
restructuring, but also that the property be maintained in
decent, safe, and sanitary condition over the long term. For
example, Section 401.558 of the regulations state that a
restructuring plan must require the owner to maintain the
project in a decent and safe con-
dition and Section 401.560 of the regulations requires that
each
Participating Administrative Entity establish management
standards that, among other things, require the project
management to protect the physical integrity of the property
over the long term through preventative maintenance, repair, or
replacement. OMHAR's operating procedures guide specifies a
number of steps that Participating Administrative Entities must
follow in determining how to address property rehabilitation
needs. Among other things, it states that Participating
Administrative Entities are to determine the deposits to the
replacement reserve that are needed to maintain the property in
acceptable physical condition over the term of the mortgage.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR ALLARD
FROM PETER GUERRERO
Q.1. In your opinion, how effective is the process for
monitoring the physical and financial health of the properties
that needed full restructurings but only received rent
reductions?
A.1. As we noted in our testimony, while the Mark-to-Market
Program has resulted in Section 8 savings, the requirement that
rents be reduced to market has increased the risk of physical
and financial problems for some properties. This includes 75
properties that, as of June 15, 2001, OMHAR had processed as
rent restructurings, but which did not meet OMHAR's
underwriting criteria and 78 properties that OMHAR had
processed as full mortgage restruc-
turings, but for which OMHAR reduced the properties' rents to
market without restructuring the properties' mortgages. We
found that while HUD's Office of Housing had developed guidance
for its field offices to follow in monitoring the physical and
financial condition of such properties, the guidance did not
specifically cover the 78 properties processed as full mortgage
restructurings. HUD has recently agreed to revise the guidance
so that it will include all properties that may be at risk and
to strengthen other provisions contained in the guidance.
However, these revisions were not yet finalized as of July 2,
2001. While this is a positive step, it will be important for
both HUD and the Congress to ensure that any problems that
arise at these properties are quickly identified and corrected
before they affect the property's value and impair the well
being of property residents.
Q.2. What changes in resources, if any, will be required in
extending the Mark-to-Market Program?
A.2. While we have not performed any analyses on the resources
needed to administer the program, it seems likely that the
workload for restructuring properties would continue to remain
at current levels for the next 3 years. Therefore, it appears
that OMHAR's resources would also need to remain at
approximately their current levels for the same period. As we
noted in our testimony, OMHAR estimated that over 1,300 Section
8 properties with above-market rents would expire after fiscal
year 2002. Of those properties, over 1,150 (88 percent) will
expire by the end of fiscal year 2004.